Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes ý No o

The number of shares outstanding of Registrant’s Common Stock, par value $0.01 per share, at ~~October 31, 2003,~~April 30, 2004, was ~~622,687,808.~~637,168,134.

(1) The quarterly information is presented based on discontinued operations classifications as of ~~September 30, 2003.~~March 31, 2004. Results of operations for periods prior to the ~~third~~first quarter of ~~2003~~2004 for components that were either disposed of or held for sale and treated as discontinued operations ~~in the fourth quarter of 2002 or the nine months ended September 30, 2003~~ have been reclassified into

discontinued operations. Subsequent to the issuance of the Company’s results for the third quarter 2002, the Company determined that the results of operations of AES Greystone, LLC (“Greystone”) should not be treated as a discontinued operation because it did not qualify as an operating business component of the Company. Accordingly, the quarterly information for the third quarter 2002 has been restated to reclassify the loss from operations of Greystone, which amounted to $109 million, net of income taxes, from income (loss) from discontinued operations to income (loss) from continuing operations. No restatement of earlier quarters was necessary because Greystone had no income or loss prior to the third quarter 2002.

The consolidated financial statements include the accounts of The AES Corporation, its subsidiaries and controlled affiliates (the “Company” or “AES”). Intercompany transactions and balances have been eliminated. Investments, in which the Company has the ability to exercise significant influence but not control, are accounted for using the equity method.

In the Company’s opinion, all adjustments necessary for a fair presentation of the unaudited results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ respectively, are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for the period ended ~~September 30, 2003~~March 31, 2004 are not necessarily indicative of the results of operations to be expected for the full year. The accompanying consolidated financial statements are unaudited and should be read in conjunction with the 2003 consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2002, which are contained in the Company’s Current Report on Form 8-K filed on June 13,~~ 2003.

Certain reclassifications have been made to ~~prior period~~prior-period amounts to conform to the ~~2003~~2004 presentation.

A business’s functional currency is the currency of the primary economic environment in which the business operates and is generally the currency in which the business generates and expends cash. Subsidiaries and affiliates whose functional currency is other than the U.S. dollar translate their assets and liabilities into U.S. dollars at the currency exchange rates in effect at the end of the fiscal period. The revenue and expense accounts of such subsidiaries and affiliates are translated into U.S. dollars at the average exchange rates that prevailed during the period. The gains or losses that result from this process, and gains and losses on intercompany foreign currency transactions which are long-term in nature, and which the Company does not intend to settle in the forseeable future, are shown in accumulated other comprehensive loss in the stockholders’ equity (deficit) section of the balance sheet. See Note 9 for the amount of foreign currency translation adjustments recorded during the three and nine months ended September 30, 2003 and 2002. Gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in determining net income.

During the third quarter of 2003, the Argentine peso devalued relative to the U.S. dollar, declining from 2.75 at June 30, 2003 to 2.87 at September 30, 2003. As a result, the Company recorded approximately $15 million of pre-tax foreign currency transaction losses during the third quarter of 2003 on its U.S. dollar-denominated net liabilities of its Argentine subsidiaries. During the nine months ended September 30, 2003, the Company recorded pre-tax foreign currency transaction gains at its Argentine subsidiaries of approximately $47 million representing a strengthening of the Argentine peso relative to the U.S. dollar from 3.32 at December 31, 2002 to 2.87 at September 30, 2003. In January 2003, CTSN, a competitive supply business in Argentina, changed its functional currency to the U.S. dollar as a result of changes in its revenue profile from Argentine pesos to U.S. dollars.

During the third quarter of 2003, the Brazilian real devalued relative to the U.S. dollar, declining from 2.87 at June 30, 2003 to 2.92 at September 30, 2003. This devaluation resulted in pre-tax foreign currency transaction losses during the third quarter of 2003 of approximately $29 million at the Brazilian businesses that was primarily related to U.S. dollar-denominated debt of approximately $970 million. During the first nine months of 2003, the Brazilian real appreciated from 3.53 at December 31, 2002 to 2.92 at September 30, 2003. The Company recorded pre-tax foreign currency transaction gains of approximately $130 million at the Brazilian businesses for the nine months ended September 30, 2003.

Over the past year the Venezuela economy has suffered from falling oil revenues, capital flight and a decline in foreign reserves. The country has experienced negative GDP growth, high unemployment, significant foreign currency fluctuations and political instability. In February 2002, the Venezuelan Government decided not to continue to support the Venezuelan currency. As a result, the Venezuelan bolivar experienced significant devaluation relative to the U.S. dollar throughout 2002 and during the first quarter of 2003. As a result of this decision by the Venezuelan government, the U.S. dollar to Venezuelan bolivar exchange rate floated as high as 1,853. Effective January 21, 2003, the Venezuelan Government and the Central Bank of Venezuela (Central Bank) agreed to suspend the trading of foreign currencies in the country for five business days and to establish new standards for the foreign currency exchange regime. Effective February 5, 2003, the Venezuelan Government and the Central Bank entered into a foreign exchange rate agreement that establishes the applicable exchange rate. The foreign exchange rate agreement established

certain conditions including the centralization of the purchase and sale of currencies within the country by the Central Bank, and the incorporation of the Foreign Currency Management Commission (CADIVI) to administer the execution of the foreign exchange rate agreement and establish certain procedures and restrictions. The acquisition of foreign currencies is subject to the prior registration by the interested party and the issuance of an authorization by CADIVI to participate in the foreign exchange regime. Furthermore, CADIVI governs the provisions of the exchange agreement, defines the procedures and requirements for the administration of foreign currencies for imports and exports, and authorizes purchases of currencies in the country. The foreign exchange rates set by such agreements are 1,596 bolivars per U.S. dollar for purchases and 1,600 bolivars per U.S. dollar for sales.

In a Resolution passed on April 14, 2003, CADIVI published a list of import duty codes identifying goods that have been approved for foreign currency purchases by registered companies. On April 28, 2003, CADIVI notified C.A. La Electricidad de Caracas (“EDC”) that its registration to import such goods had been approved. On April 22, 2003, CADIVI published the general procedures regarding the acquisition of foreign currency for payments of external debt entered into by private companies prior to January 22, 2003. As of September 30, 2003, EDC was able to obtain $114 million at the official rate to service external debt and pay suppliers.

~~As a result of the exchange controls in place, the value of the Venezuelan bolivar remained consistent at 1,600 bolivars per U.S. dollar throughout the three month period ended September 30, 2003.~~ During the third quarter of 2003, the Company recorded net pre-tax foreign currency transaction gains of approximately $12 million, as well as approximately $4 million of pre-tax marked-to-market losses on foreign currency forward and swap contracts. The foreign currency transaction gains were the result of securities transactions offset by depreciation of the U.S. dollar relative to the euro, which is the currency of some portion of EDC’s debt. The tariffs at EDC are adjusted semi-annually to reflect fluctuations in inflation and the currency exchange rate. EDC obtained tariff increases of 26% in the first half of 2003 and 10% in September 2003. During the nine months ended September 30, 2003, the Company recorded net pre-tax foreign currency transaction losses of approximately $4 million, as well as approximately $5 million of pre-tax mark to market losses on foreign currency forward and swap contracts. EDC uses the U.S. Dollar as its functional currency. A portion of EDC’s debt is denominated in the Venezuelan Bolivar and, as of September 30, 2003, EDC had net Venezuelan Bolivar monetary liabilities thereby creating foreign currency gains when the Venezuelan Bolivar devalues.

During the third quarter of 2003, the Company also experienced net foreign currency losses of $7 million at its businesses outside of Brazil, Argentina and Venezuela. This amount includes losses of $4 million at businesses located in the Dominican Republic and losses of $3 million at our generation businesses in Pakistan.

Basic and diluted earnings per share computations are based on the weighted average number of shares of common stock and potential common stock outstanding during the period, after giving effect to stock splits. Potential common stock, for purposes of determining diluted earnings per share, includes the dilutive effects of stock options, warrants, deferred compensation arrangements and convertible securities. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per ~~Share”.~~Share.” Income ~~(loss)~~ from continuing operations, weighted average shares and related earnings per share ~~(EPS)~~(“EPS”) are shown below (in millions, except earnings per share amounts).

There were approximately ~~27,766,079~~26,790,091 and ~~32,903,022~~32,074,505 options outstanding at ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ respectively, which were capitalized omitted from the earnings per share calculation ~~for the three months ended September 30, 2003 and 2002~~ because they were ~~antidilutive.~~anti-dilutive. All term convertible preferred securities (“~~Tecons”~~TECONS”) and convertible debt were also omitted from the earnings per share calculation ~~for the three months ended September 30, 2003 and 2002~~at March 31, 2004, because they were ~~antidilutive.~~anti-dilutive.

There were approximately 27,924,429 and 28,126,413 options outstanding at September 30, 2003 and 2002, respectively, that were omitted from the earnings per share calculation for the nine months ended September 30, 2003 and 2002 because they were antidilutive. All Tecons and convertible debt were also omitted from the earnings per share calculation for the nine months ended September 30, 2003 and 2002 because they were antidilutive.

~~Total options outstanding at September 30, 2003 and 2002 were 41,688,915 and 33,905,428, respectively.~~

4.3. ~~Discontinued Operations and Assets Held for Sale~~DISCONTINUED OPERATIONS

In September 2003, AES reached an agreement to sell 100% of its ownership interest in AES Whitefield, a generation ~~business. The sale is structured as a stock purchase agreement.~~business located in the United States. At ~~September 30,~~December 31, 2003, this business was classified as held for sale in accordance with SFAS No. 144. ~~AES Whitefield was previously reported in the contract generation segment.~~

On August 8, 2003, the Company decided to sell AES Communications Bolivia, located in La Paz, Bolivia and has reported this business as an asset held for sale. As a result of this decision, the Company recorded a pre-tax impairment charge of $29 million during the third quarter of 2003 to reduce the carrying value of the assets to their estimated fair value in accordance with SFAS No. 144. AES expects to complete the sale during the first half of 2004. AES Communications Bolivia was previously reported in the competitive supply segment.

In July 2003, AES reached an agreement to sell 100% of its ownership interest in AES Mtkvari, AES Khrami and AES Telasi for gross proceeds of $23 million. At June 30, 2003 these businesses were classified as held for sale and the Company recorded a pre-tax impairment charge of $204 million during the second quarter of 2003 to reduce the carrying value of the assets to their estimated fair value in accordance with SFAS No. 144. This transaction ~~closed in August 2003 and resulted in a total write off of approximately $210 million.~~was completed on March 9, 2004 for nominal consideration. AES ~~Mtkvari and AES Khrami were previously reported in the contract generation segment and AES Telasi was previously reported in the growth distribution segment.~~

~~During the first quarter of 2003, AES committed to a plan to sell its ownership in AES Barry Limited (“AES Barry”), and had classified it in discontinued operations.~~ On July 24, 2003, the Company reached an agreement to sell substantially all the physical assets of AES Barry to an unrelated third party for £40 million (or approximately $62 million). The sale proceeds were used to discharge part of AES Barry’s debt and to pay certain transaction costs and fees. The Company will continue to own the stock of AES Barry while AES Barry pursues a £60 million claim against TXU EET, which is currently in bankruptcy administration. AES Barry will receive 20% of amounts recovered from the administrator. If the proceeds from TXU EET are not sufficient to repay the bank debt, the banks have recourse to the shares of AES Barry, but have no recourse to the Company for a default by AES Barry.

An amended credit agreement for the sale of the AES Barry assets was signed on July 24, 2003. As a result of the amended credit agreement, AES forfeited control over the remaining assets of AES Barry, namely the claim against TXU EET. Accordingly, the Company deconsolidated AES Barry and began accounting for its investment using the equity method prospectively from the date of the credit agreement. ~~AES Barry was previously reported in the competitive supply segment.~~

On March 14, 2003 AES reached an agreement to sell 100% of its ownership interest in both AES Haripur Private Ltd. ("Haripur") and AES Meghnaghat Ltd. ("Meghnaghat"), both generation businesses in Bangladesh, to CDC Globeleq, the completion of which sale is subject to certain conditions, including obtaining governmental and lender consents. Those governmental and lender consents were not obtained by the August 14, 2003, termination date in the original share purchase agreement (“SPA”). On September 17, 2003, AES and CDC Globeleq agreed to extend until February 17, 2004, the date by which the conditions to the sale must be satisfied, including obtaining governmental and lender consents, or the SPA will terminate. AES and CDC Globeleq on September 17, 2003 also agreed to increase the equity purchase price for the sale from $127 million to $137 million, subject to purchase price adjustments at the time of

completion of the sale which we currently estimate to be an additional $10 to 15 million. While the Company believes that these consents can be obtained prior to the February 17, 2004 termination date, there can be no assurance that the consents will be obtained by that date or that the sale will ultimately be completed. These two businesses were previously reported in the contract generation segment.

In April 2002, AES reached an agreement to sell 100% of its ownership interest in CILCORP, a utility holding company whose largest subsidiary is Central Illinois Light Company (“CILCO”), to Ameren Corporation in a transaction valued at $1.4 billion including the assumption of debt and preferred stock at the closing. During the year ended December 31, 2002, a pre-tax goodwill impairment expense of approximately $104 million was recorded to reduce the carrying amount of the Company’s investment to its estimated fair market value. The goodwill was considered impaired since the current fair market value of the business was less than its carrying value. The fair market value of AES’s investment in CILCORP was estimated using the expected sale price under the related sales agreement. The transaction also includes an agreement to sell AES Medina Valley Cogen, a gas-fired cogeneration facility located in CILCO’s service territory. The sale of CILCORP by AES was required under the Public Utility Holding Company Act (PUHCA) when AES merged with IPALCO, a regulated utility in Indianapolis, Indiana in March 2001. The transaction closed in January 2003, and generated approximately $495 million in cash proceeds, net of transaction expenses. CILCORP was previously reported in the large utilities segment.

On October 3, 2003, AES Drax Power Limited (“Drax”) changed its name to Drax Power Limited to reflect the withdrawal of AES from the operation of the Drax power plant in August 2003. Drax Power Limited, a former subsidiary of AES, is the operator of the Drax power plant, Britain’s largest power station.

Based on negotiations through the end of June 2003, Drax, AES and the steering committee (the “Steering Committee”) representing the syndicate of banks (the “Senior Lenders”), which financed the Eurobonds issued by Drax to finance the acquisition of the Drax power plant, and the ad hoc committee formed by holders of Drax’s Senior Bonds (the “Ad Hoc Committee” and, together with the Steering Committee, the “Senior Creditors Committees”), reached agreement on more detailed terms of the Restructuring, and each of the Senior Creditors Committees, Drax and AES indicated their support for a Restructuring to be implemented based upon the proposed restructuring terms (the “June Restructuring Proposal”) that was published by Drax on Form 6-K on June 30, 2003.

On July 23, 2003, Drax received a letter from International Power plc., pursuant to which it offered to replace AES in the Restructuring and to purchase certain debt to be issued in the Restructuring described in the June Restructuring Proposal (the “IP Proposal”). On July 28, 2003, AES sent a letter to the Senior Creditors Committees and to Drax indicating that AES would withdraw its support for, and participation in, the Restructuring unless each member of the Senior Creditors Committees met certain conditions by no later than August 5, 2003, including support for the June Restructuring Proposal (subject to documentation), rejection of the IP Proposal and inclusion in the extended standstill agreement of an agreement not to discuss or negotiate with any person regarding the sale of the Drax power station or the participation of any person in the Restructuring in lieu of AES.

Because none of the written confirmations requested by AES were received, on August 5, 2003 AES withdrew its support for, and participation in, the June Restructuring Proposal. Subsequently, the directors appointed by AES resigned from the boards of Drax, as well as from the boards of all other relevant Drax companies below Drax Energy.

On September 30, 2003, the security trustee delivered enforcement notices to Drax, thereby effecting the revocation of voting rights in the shares in AES Drax Acquisition Limited, Drax’s parent company which were mortgaged in favor of the security trustee.

AES has no continuing involvement in Drax and has classified Drax within discontinued operations as of September 30, 2003. We understand, based solely on the publicly filed information contained in Drax’s Form 6-K filed on October 28, 2003, that Drax has received irrevocable undertakings from certain creditors to vote in favor of a restructuring proposal which was described in the Form 6-K filed by Drax on September 15, 2003 and that Drax has entered into a definitive agreement with International Power plc within which International Power plc has agreed to fund the cash-out option for a proportion of the restructured debt as described in Drax’s Form 6-Ks filed on September 15, 2003 and October 28, 2003.

Since certain of Drax’s forward looking debt service cover ratios as of June 30, 2002 were below required levels, Drax was not able to make any cash distributions to Drax Energy, the holding company high-yield note issuer, at that time. Drax expects that the ratios, if calculated as of December 31, 2002 or as of June 30, 2003, would also have been below the required levels at December 31, 2002 or June 30, 2003, as applicable. In addition, as part of the standstill arrangements, Drax deferred a certain portion of the principal payments due to its Senior Lenders as of December 31, 2002 and as of June 30, 2003.

As a consequence of the foregoing, Drax was not permitted to make any distributions to Drax Energy. As a result, Drax Energy was unable to make the full amount of the interest payment of $11.5 million and £7.6 million due on its high-yield notes on February 28, 2003. Drax Energy’s failure to make the full amount of the required interest payment constituted an event of default under its high-yield notes. The high yield note holders delivered a notice of acceleration on May 19, 2003 and delivered the required notices under the intercreditor arrangements on May 28, 2003. Pursuant to intercreditor agreements, the holders of the high-yield notes had no enforcement rights until 90 days following the delivery of such notices, which 90-day period expired on August 26, 2003. DraxWhitefield was previously reported in the competitive supply segment.

In December 2002, AES reached an agreement to sell 100% of its ownership interest in both AES Mt. Stuart and AES Ecogen, both generation businesses in Australia, to Origin Energy Limited and to a consortium of Babcock & Brown and Prime Infrastructure Group, respectively. The total sales price for both businesses was approximately $171 million. The sale of AES Mt. Stuart closed in January 2003 and resulted in a loss on sale of approximately $2 million after tax. The sale of AES Ecogen closed in February 2003 and resulted in a gain on sale of approximately $23 million after tax. AES Mt. Stuart and AES Ecogen were previously reported in the contract generation segment.

In December 2002, AES reached an agreement to sell 100% of its ownership interests in Songas Limited (“Songas”) and AES Kelvin Power (Pty.) Ltd. (“AES Kelvin”) to CDC Globeleq for approximately $337 million, which includes the assumption of project debt. The sale of AES Kelvin closed in March 2003, and the sale of Songas closed in April 2003. Both Songas and AES Kelvin were previously reported in the contract generation segment.

~~In December 2002, AES~~ classified its investment in Mountainview Power Company, a generation business located in the U.S., as held for sale. In the fourth quarter of 2002, the Company recorded a pre-tax impairment charge of $415 million ($270 million after-tax) to reduce the carrying value of Mountainview’s assets to estimated realizable value in accordance with SFAS No. 144. The determination of the realizable value was based on available market information obtained through discussions with potential buyers. In January 2003, the Company entered into an agreement to sell Mountainview for $30 million with another $20 million payment contingent on the achievement of project specific milestones. The transaction closed in March 2003 and resulted in a gain on sale of approximately $4 million after tax. In March 2004 the contingencies were resolved and the final payment of $20 million was received and recognized as a gain. Mountainview was previously reported in the competitive supply segment.

All of the business components discussed above are classified as discontinued operations in the accompanying consolidated statements of operations. Previously issued statements of operations have been restated to reflect discontinued operations reported subsequent to the original issuance date. ~~The revenues associated with the~~

Information for business components included in discontinued operations were $204 million and $242 million for the three months ended September 30, 2003 and 2002, respectively, and $797 million and $1.3 billion for the nine months ended September 30, 2003 and 2002, respectively. The pretax income (loss) associated with the discontinued operations were $62 million and ($124) million for the three months ended September 30, 2003 and 2002, respectively, and ($200) million and ($171) million for the nine months ended September 30, 2003 and 2002, respectively.is as follows (in millions):

The gain (loss) on disposal and impairment write-downs for those businesses sold or held for sale, net of tax associated with the discontinued operations, was $81 million and ($234) million for the three months ended September 30, 2003 and 2002, respectively. The loss on disposal and impairment write-downs for those businesses sold or held for sale, net of tax associated with the discontinued operations, was $112 million and $434 million for the nine months ended September 30, 2003 and 2002, respectively.

The assets and liabilities associated with the discontinued operations and assets held for sale are segregated on the consolidated balance sheets at ~~September 30, 2003~~March 31, 2004 and December 31, ~~2002.~~2003. The carrying amount of major asset and liability classifications for businesses recorded as discontinued operations and held for sale are as follows:

5.4. ~~Other Asset Sales and Impairment Expense~~INVESTMENTS IN AND ADVANCES TO AFFILIATES

In 1999 the Company initiated a development project in Honduras which consisted of a 580-MW combined-cycle power plant fueled by natural gas; a liquefied natural gas import terminal with storage capacity of one million barrels; and transmission lines and line upgrades (together ��El Faro” or “the Project”). During 2002, the Company announced a number of strategic initiatives designed to stabilize the financial condition of the Company, which included the sale of all or part of certain of the Company’s subsidiaries and significantly reducing the amount of capital invested in development projects. During April 2003, after consideration of existing business conditions and future opportunities, the Company elected to offer the Project for sale. While discussions have been ongoing, no formal agreements have been reached thus far. Upon review of the current circumstances surrounding the Project, the Company believes that, in accordance with Statement of Financial Accounting Standards No. 144, the Project is deemed to be impaired since the carrying amount of the Company’s investment in the Project exceeds its fair value. As a result during the second quarter of 2003, the Company wrote off capitalized costs of approximately $22 million associated with the Project.

During March 2003, the Company announced an agreement to sell an approximately 32% ownership interest in AES Oasis Limited (“AES Oasis”). AES Oasis is a newly created entity that was originally planned to own two electric generation projects and desalination plants in Oman and Qatar (AES Barka and AES Ras Laffan, respectively), the oil-fired generating facilities, AES LalPir and AES PakGen in Pakistan, as well as future power projects in the Middle East. During the second quarter of 2003, the parties agreed in principle to alter the structure of the transaction to exclude AES Ras Laffan, the Company’s electric generation project and desalination plant in Qatar, and to offer for sale approximately 39% of our ownership interest in the revised AES Oasis entity. Completion of the sale as contemplated under the agreement is subject to certain conditions, including government and lender approvals that must be met and obtained prior to November 30, 2003, on which date the Oasis Stock Purchase Agreement (“Oasis SPA”) would terminate. There can be no assurance that the sale will ultimately be completed. At the time of closing, AES will receive cash proceeds of approximately $150 million.

On August 8, 2003, AES decided to discontinue the construction and development of AES Nile Power in Uganda (“Bujagali”). In connection with this decision, AES wrote off its investment in Bujagali of approximately $76 million before income taxes in the third quarter of 2003. The Company is also working in conjunction with the Government of Uganda, the World Bank and the International Finance Corporation (“IFC”) to evaluate ways to ensure an orderly transition for the project to continue without the Company’s participation.

~~The Company records its share of earnings from its equity investees on a pre-tax basis. The Company’s share of the investee’s income taxes is recorded in income tax expense.~~

Effective August 1, 2003, the Company deconsolidated its investment in AES Barry Ltd. (“Barry”), a competitive supply generation plant in the United Kingdom, as a result of the sale of substantially all of its physical assets to an unrelated third party. Although the Company continues to own 100% of Barry’s stock, AES signed a credit agreement with Barry’s lenders which essentially gave the lenders operational and financial control of Barry. As a result of this transaction, the Company began accounting for Barry as an equity method affiliate prospectively beginning August 1, 2003.

In August 2000, a subsidiary of the Company acquired a 49% interest in Songas Limited (“Songas”) for approximately $40 million. The Company acquired an additional 16.79% of Songas for approximately $12.5 million, and the Company began consolidating this entity in 2002. Songas owns the Songo Songo Gas-to-Electricity Project in Tanzania. In December 2002, the Company signed a Sales Purchase Agreement to sell 100% of our ownership interest in Songas. The sale of Songas closed in April 2003.

The following tables present summarized comparative financial information (in millions) offor the ~~entities in which the Company has the ability to exercise significant influence but does not control and that are~~Company’s investments accounted for using the equity method. The results of operations of Eletropaulo Metropolitana Electricidade de Sao Paulo S.A. (“Eletropaulo”) and Light Servicos de Electricidade S.A. (“Light”) are included in the tables for January 2002 since AES acquired a controlling interest in Eletropaulo and began consolidating the subsidiary in February 2002 and simultaneously gave up its interest in Light.

The components of other ~~expense~~(expense) are summarized as follows (in millions):

Also in the first quarter of 2002, EDC sold an available-for-sale security resulting in gross proceeds of $92 million. The realized loss on the sale was $57 million. Approximately $48 million of the loss related to recognition of previously unrealized losses. This loss is recorded in loss on sale or write-down of investments and asset impairment expense in the accompanying consolidated statement of operations.6. CONTINGENCIES

8.ENVIRONMENTAL ~~Contingencies~~—It is the Company’s policy to accrue for remediation costs when it is probable that such costs will be incurred and ~~Risks~~when a range of loss can be reasonably estimated. The Company has accrued approximately $27 million as of March 31, 2004 for probable environmental remediation and restoration liabilities. Based on currently available information and analysis, the Company believes that it is

As reported in our Current Report on Form 8-K filed June 13, 2003, Eletropaulo in Brazil and Edelap, Eden/Edes, Parana and TermoAndes, all in Argentina, are still in default. In addition, during the first quarter of 2003, CEMIG and Sul in Brazil each went into default on its outstanding debt. Furthermore, as a result of delays encountered in completing construction of the project, AES Wolf Hollow failed to convert its construction loan to a term loan prior to the construction loan’s maturity date of June 20, 2003. AES Wolf Hollow believes that these delays have been caused by the failure of third parties to perform their contractual obligations, and it is pursuing its legal claim against such third parties. The failure to convert the loan has resulted in a default under AES Wolf Hollow’s credit facility, and discussions with the project lender relating to its potential exercise of remedies and/or potential restructurings are ongoing. There can be no assurances that the project lender will not seek to exercise its remedies in connection with the continuing default under AES Wolf Hollow’s credit facilities. The total debt classified as current in the accompanying consolidated balance sheets related to such defaults was $2.2 billion at September 30, 2003.

On September 8, 2003, the Company entered into a memorandum of understanding with the National Development Bank of Brazil (“BNDES”) to restructure the outstanding loans owed to BNDES by several of AES' Brazilian subsidiaries. The restructuring will include the creation of a new company that will hold AES's interests in Eletropaulo, Uruguaiana and Tiete. Sul may be contributed upon the successful completion of its financial restructuring. AES will own 50.1%, and BNDES will own 49.9%, of the new company. Under the terms of the agreement, 50% of the currently outstanding BNDES debt of $1.2 billion will be converted into 49.9% of the new company. The remaining outstanding balance of $515 million (which remains non-recourse to AES) will be payable over a period of 10 to 12 years. AES and its subsidiaries will also contribute $85 million as part of the restructuring, of which $60 million will be contributed at closing and $25 million will be contributed one year after closing.

~~Closing of the transaction is subject to the negotiation and execution of definitive documentation, certain lender and regulatory approvals and valuation diligence to be conducted by BNDES.~~

~~Sul and AES Cayman Guaiba, a subsidiary of the Company that owns the Company’s interest in Sul, are facing near-term debt payment~~

~~obligations~~possible that ~~must~~costs associated with such liabilities or as yet unknown liabilities may exceed current reserves in amounts or a range of amounts that could be ~~extended, restructured, refinanced or paid. Sul had outstanding debentures~~material but cannot be estimated as of approximately $77 million (including accrued interest), at the September 30, 2003 exchange rate that were restructured on December 1, 2002. The restructured debentures have an interest payment due in December 2003 and principal payments due in 12 equal monthly installments commencing on December 1, 2003. Additionally, Sul has an outstanding working capital loan of approximately $10 million (including accrued interest) which is to be repaid in 12 monthly installments commencing on January 30,March 31, 2004. Furthermore, on January 20, 2003, Sul and AES Cayman Guaiba signed a letter agreement with the agent for the banks under the $300 million AES Cayman Guaiba syndicated loan for the restructuring of the loan. A $30 million principal payment due on January 24, 2003, under the syndicated loan was waived by the lenders through April 24, 2003, and has not been paid. While the lenders have not agreed to extend any additional waivers, they have not exercised their rights under the $50 million AES parent guarantee. There can be no assurance ~~however,~~ that ~~an additional waiver~~activities at these or ~~a restructuring of this loan will be completed.~~

~~None of the AES subsidiaries in default on their non-recourse project financings at September 30, 2003 are material subsidiaries as defined~~any other facilities identified in the ~~parent’s indebtedness agreements, and therefore, none of these defaults can cause a cross-default~~future may not result in additional environmental claims being asserted against the Company or ~~cross-acceleration under~~additional investigations or remedial actions being required. See Note 12 “Contingencies — Environmental” in the ~~parent’s revolving credit agreement or other outstanding indebtedness referred to~~Company’s financial statements included in ~~our Current~~its Annual Report filed on Form ~~8-K filed on June 13,~~10-K for the year ended December 31, 2003 ~~nor are they expected to otherwise have~~for a ~~material adverse effect on the Company’s results~~more complete discussion of ~~operations or financial condition.~~our environmental contingencies.

At September 30, 2003, the Company had provided outstanding financial and performance related guarantees or other credit support commitments to or for the benefit of its subsidiaries, which were limited by the terms of the agreements, to an aggregate of approximately $557 million (excluding those collateralized by letter-of-credit obligations discussed below). Of this amount, $36 million represents credit enhancements for non-recourse debt that is recorded in the accompanying consolidated balance sheets. The Company is also obligated under other commitments, which are limited to amounts, or percentages of amounts, received by AES as distributions from its project subsidiaries. These amounts aggregated $25 million as of September 30, 2003. In addition, the Company has commitments to fund its equity in projects currently under development or in construction. At September 30, 2003, such commitments to invest amounted to approximately $21 million (excluding those collateralized by letter-of-credit obligations).

At September 30, 2003, the Company had $96 million in letters of credit outstanding, which operate to guarantee performance relating to certain project development activities and subsidiary operations. The Company pays a letter-of-credit fee ranging from 0.50% to 5.00% per annum on the outstanding amounts. In addition, the Company had $4 million in surety bonds outstanding at September 30, 2003.

The U.S. Environmental Protection Agency (“EPA”) commenced an industry-wide investigation of coal-fired electric power generators in the late 1990s to determine compliance with environmental requirements under the Federal Clean Air Act associated with repairs, maintenance, modifications and operational changes made to the facilities over the years. The EPA’s focus is on whether the changes were subject to new source review or new performance standards, and whether best available control technology was or should have been used. On August 4, 1999, the EPA issued a Notice of Violation (“NOV”) to the Company’s Beaver Valley plant, generally alleging that the facility failed to obtain the necessary permits in connection with certain changes made to the facility in the mid-to-late 1980s. The Company believes it has meritorious defenses to any actions asserted against it and expects to vigorously defend itself against the allegations.

In May 2000, the New York State Department of Environmental Conservation (“DEC”) issued a NOV to NYSEG for violations of the Federal Clean Air Act and the New York Environmental Conservation Law at the Greenidge and Westover plants related to NYSEG’s alleged failure to undergo an air permitting review prior to making repairs and improvements during the 1980s and 1990s. Pursuant to the agreement relating to the acquisition of the plants from NYSEG, AES Eastern Energy agreed with NYSEG that AES Eastern Energy will assume responsibility for the NOV, subject to a reservation of AES Eastern Energy’s right to assert any applicable exception to its contractual undertaking to assume pre-existing environmental liabilities. The Company believes it has meritorious defenses to any actions asserted against it and expects to vigorously defend itself against the allegations; however, the NOV issued by the DEC, and any additional enforcement actions that might be brought by the New York State Attorney General, the DEC or the EPA, against the Somerset, Cayuga, Greenidge or Westover plants, might result in the imposition of penalties and might require further emission reductions at those plants. In addition to the NOV, the DEC alleged, after our acquisition of the Cayuga, Westover, Greenidge, Hickling and Jennison plants from NYSEG in May 1999, air permit violations at each of those plants. Specifically, DEC has alleged exceedences of the opacity emissions limitations at these plants. With respect to pre-May 1999 and post-May 1999 violations, respectively, DEC has notified NYSEG, on the one hand, and AES, on the other, of their respective liability for such alleged violations. To remediate these alleged violations, DEC has proposed that each of AES and NYSEG pay fines and penalties in excess of $100,000. Resolution of this matter could also require AES to install additional pollution control technology at these plants. NYSEG has asserted a claim against AES for indemnification against all penalties and other related costs arising out of DEC’s

On April 25, 2003, a fuel oil spill occurred at a facility owned by AES Panama SA (AES Panama) which may have led to the contamination of a nearby river. AES Panama immediately began clean up efforts once the spill was detected. An environmental consultant has evaluated the effectiveness of the clean-up and has determined that AES Panama’s clean-up efforts were effective. All soil and water samples now indicate oil concentrations are below detection limits. AES Panama has cooperated fully with the investigating authorities. On May 7, 2003, the National Environmental Authority of Panama (ANAM) announced that it was fining AES Panama $250,000 for the spill and requiring a report on the clean-up actions and new operational controls to be put in place to ensure that such an incident does not occur in the future. AES Panama has appealed the fine.

The Company’s generating plants are subject to emission regulations. The regulations may result in increased operating costs, fines or other sanctions, or the purchase of additional pollution control equipment, if emission levels are exceeded.

The Company reviews its obligations as it relates to compliance with environmental laws, including site restoration and remediation. Although AES is not aware of any costs of complying with environmental laws and regulations which would reasonably be expected to result in a material adverse effect on its business, consolidated financial position or results of operations except as described above, there can be no assurance that AES will not be required to incur material costs in the future.

— In September 1999, a judge in the Brazilian appellate state court of Minas Gerais granted a temporary injunction suspending the effectiveness of a shareholders’ agreement between Southern Electric do Brasil Participacoes, Ltda. (“SEB”) and the state of Minas Gerais concerning CEMIG. AES’s investment in CEMIG is through SEB. This shareholders’ agreement granted SEB certain rights and powers in respect of CEMIG (the “Special Rights”). The temporary injunction was granted pending determination by the lower state court of whether the shareholders’ agreement could grant SEB the Special Rights. In October 1999, the full state appellate court upheld the temporary injunction. In March 2000, the lower state court in Minas Gerais ruled on the merits of the case, holding that the shareholders’ agreement was invalid where it purported to grant SEB the Special Rights. In August 2001, the state appellate court denied an appeal of the merits decision, and extended the injunction. In October 2001, SEB filed two appeals against the decision on the merits of the state appellate court, one to the Federal Superior Court and the other to the Supreme Court of Justice. The state appellate court denied access of these two appeals to the higher courts, and in August 2002, SEB filed two interlocutory appeals against such decision, one directed to the Federal Superior Court and the other to the Supreme Court of Justice. These appeals continue to be pending. SEB intends to vigorously pursue by all legal means a restoration of the value of its investment in ~~CEMIG. However,~~CEMIG; however, there can be no assurances that it will be successful in its efforts. Failure to prevail in this matter may limit the SEB’s influence on the daily operation of CEMIG.

In November 2000, the Company was named in a purported class action suit along with six other defendants, alleging unlawful manipulation of the California wholesale electricity market, resulting in inflated wholesale electricity prices throughout California. ~~Alleged~~The alleged causes of action include violation of the Cartwright Act, the California Unfair Trade Practices Act and the California Consumers Legal Remedies Act. In December 2000, the case was removed from the San Diego County Superior Court to the U.S. District Court for the Southern District of California. On July 30, 2001, the Court remanded the case back to San Diego Superior Court. The case was consolidated with five other lawsuits alleging similar claims against other defendants. In March 2002, the plaintiffs filed a new master complaint in the consolidated action, which asserted the claims asserted in the earlier action and names ~~the Company,~~AES, AES Redondo Beach, L.L.C., AES Alamitos, L.L.C., and AES Huntington Beach, L.L.C. as defendants. In May 2002, the case was removed by certain cross-defendants from the San Diego County Superior Court to the United States District Court for the Southern District of California. ~~Defendants there~~The plaintiffs filed a motion to ~~dismiss the action in its entirety. The District Court subsequently ordered~~remand the case ~~remanded back~~ to ~~the~~ state court, which ~~order is currently~~was granted on ~~appeal~~December 13, 2002. Certain defendants have appealed that decision to the United States Court of Appeals for the Ninth Circuit. That appeal is pending before the Ninth Circuit. The Company believes that it has meritorious defenses to any actions asserted against itus and ~~expects~~expect that itwe will defend ~~itself~~ourselves vigorously against the allegations.

In addition, the crisis in the California wholesale power markets has directly or indirectly resulted in several administrative and legal actions involving the Company’s businesses in California. Each of the Company’s businesses in California (AES Placerita and AES Southland, which is comprised of AES Redondo Beach, AES Alamitos, and AES Huntington Beach) ~~is subject to~~have received subpoenas and/or requests for information in connection with overlapping state investigations by the California Attorney General’s Office, the Market Oversight and Monitoring Committee of the California Independent System Operator (“ISO”), the California Public Utility ~~Commission. The~~Commission and a subcommittee of the California Senate. These businesses have cooperated with the investigation and responded to multiple requests for the production of documents and data surrounding the operation and bidding behavior of the plants.

In August 2000, the Federal Energy Regulatory Commission ~~("FERC"~~(“FERC”) announced an investigation into the national wholesale power markets, with particular emphasis upon the California wholesale ~~power through the ISO and PX spot markets,~~electricity market, in order to determine whether ~~prices were unjust~~there has been anti-competitive activity by wholesale generators and ~~unreasonable. The Administrative Law Judge issued proposed findings~~marketers of ~~fact and the FERC affirmed those findings in large part. The FERC order would not cause AES Southland to pay refunds.~~electricity. The FERC has ~~ordered~~requested documents from each of the ~~ISO~~AES Southland plants and ~~PX to calculate refunds that would be owed by~~AES Placerita. AES Southland and AES Placerita ~~and others. The order is being appealed.~~have cooperated fully with the FERC investigation.

In a separate investigation that spun out of the initial California investigation, the FERC Staff is investigating physical withholding by generators. AES Southland and AES Placerita have received data requests from the FERC Staff, have responded to those data requests and have cooperated fully with the investigation. The physical withholding investigation is ongoing.

The FERC also initiated an investigation ~~in to~~into economic withholding. AES Placerita has received data requests from the FERC Staff, has responded to those data requests, and has cooperated fully with the investigation. The economic withholding investigation is ongoing.

17In November 2002, the Company was served with a grand jury subpoena issued on application of the United States Attorney for the Northern District of California. The subpoena sought, inter alia, certain categories of documents related to the generation and sale of electricity in California from January 1998 to the date of the subpoena. The Company cooperated in providing documents in response to the subpoena.

In July 2001, a petition was filed against CESCO, an affiliate of the Company by the Grid Corporation of Orissa, India (“Gridco”), with the Orissa Electricity Regulatory Commission (“OERC”), alleging that CESCO has defaulted on its obligations as a government licensed distribution ~~company;~~company, that CESCO management abandoned the management of ~~CESCO;~~CESCO, and asking for interim measures of protection, including the appointment of a government regulator to manage CESCO. Gridco, a state owned entity, is the sole energy wholesaler to CESCO. In August 2001, the management of CESCO was handed over by the OERC to a government administrator that was appointed by the OERC. By its ~~Order~~order of August 2001, the OERC held that the Company and other CESCO shareholders were not proper parties to the OERC proceeding and terminated the proceedings against the Company and other CESCO shareholders. Subsequently, OERC issued notices regarding the OERC proceedings to the Company and the other CESCO shareholders. The Company has advised OERC that the Company was not a party. In October 2003, OERC again forwarded a notice to the Company advising of a hearing in the OERC matter scheduled for November 2003. The Company, in November 2003, again advised the OERC that the Company is not subject to the OERC proceedings. Gridco also has asserted that a Letter of Comfort issued by the Company in connection with the Company’s investment in CESCO obligates the Company to provide additional financial support to cover CESCO’s financial obligations. In December 2001, a notice to arbitrate pursuant to the Indian Arbitration and Conciliation Act of 1996 was served on the Company by Gridco pursuant to the terms of the CESCO Shareholder’s Agreement (“SHA”), between Gridco, the Company, AES ODPL, and Jyoti Structures. The notice to arbitrate failed to detail the disputes under the SHA for which the Arbitration had been initiated. After both parties had appointed arbitrators, and those two arbitrators appointed the third neutral arbitrator, Gridco filed a motion with the India Supreme Court seeking the removal of ~~AES’~~AES’s arbitrator and the neutral chairman arbitrator. In the fall of 2002, the Supreme Court rejected Gridco’s motion to remove the arbitrators. Gridco has dropped the challenge of the appointment of neutral chairman arbitrator; however, it retained the challenge of removal of ~~AES'~~AES’s arbitrator. Although that motion remains pending, the parties have filed their respective statement of claims, counter claims and defenses. On or about July 26, 2003, Gridco filed a motion in the District Court of Bhubaneshwar, India, seeking a stay of the arbitration and requesting that the District Court terminate the mandate of the neutral chairman arbitrator. The District Court gave a stay order, and the case was scheduled to be heard in ~~mid November~~mid-November 2003. Thereafter, ~~pursuant to a separate motion filed with the Court in India,~~ a further ~~temporary~~ stay of the arbitration proceedings was ~~granted until the India Court issued a decision on whether or~~ not ~~to grant a permanent stay of the arbitration. In the interim, and pending a decision by the Court as to whether to grant a permanent stay, no new~~granted. Arbitration proceedings have been tentatively scheduled for ~~the arbitration.~~July 2004. The Company believes that it has meritorious defenses to any actions asserted against it and expects that it will defend itself vigorously against the allegations.

In November 2002, the Company was served with a grand jury subpoena issued on application of the United States Attorney for the Northern District of California. The subpoena sought, inter alia, certain categories of documents related to the generation and sale of electricity in California from January 1998 to the present. The Company complied fully with its legal obligations in responding to the subpoena.

In April 2002, IPALCO and certain former officers and directors of IPALCO were named as defendants in a purported class action lawsuit filed in the United States District Court for the Southern District of Indiana. On May 28, 2002, an amended complaint was filed in the lawsuit. The amended complaint asserts that IPALCO and former members of the pension committee for the Indianapolis Power & Light Company thrift plan breached their fiduciary duties to the plaintiffs under the Employees Retirement Income Security Act by investing assets of the thrift plan in the common stock of IPALCO prior to the acquisition of IPALCO by the Company. In ~~February 2003, the Court denied the defendants motion~~December 2002, plaintiffs moved to ~~dismiss the lawsuit. On September 30, 2003, the~~certify this case as a class action. The Court granted ~~plaintiffs’~~the motion for class ~~certification.~~certification on September 30, 2003. On October 31, 2003, the parties filed ~~competing motions~~cross-motions for summary ~~judgment.~~judgment on liability. Those motions currently are pending before the Court. IPALCO believes it has meritorious defenses to the claims asserted against it and intends to defend this lawsuit vigorously.

In July 2002, the Company, Dennis W. Bakke, Roger W. Sant, and Barry J. Sharp were named as defendants in a purported class action filed in the United States District Court for the Southern District of Indiana. In September 2002, two virtually identical complaints were filed against the same defendants in the same court. All three lawsuits purport to be filed on behalf of a class of all persons who exchanged their shares of IPALCO common stock for shares of AES common stock issued pursuant to ~~the Registration Statement~~a registration statement dated and filed with the SEC on August 16, 2000. The complaint purports to allege violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 based on statements in or omissions from the ~~Registration Statement covering~~registration statement concerning certain secured equity-linked loans by AES ~~subsidiaries,~~subsidiaries; the supposedly volatile nature ~~of the price~~ of AES stock, as well as AES’s allegedly unhedged operations in the United ~~Kingdom.~~Kingdom and the alleged effect of the New Electrical Trading Agreements (“NETA”) on AES’s United Kingdom operations. In October 2002, the defendants moved to consolidate these three actions with the IPALCO securities lawsuit referred to immediately below. On November 5, 2002, the Court appointed lead plaintiffs and lead and local counsel. On March 19, 2003, the Court entered an order on defendants’ motion to consolidate, in which the Court deferred its ruling on defendants’ motion and referred the actions to a magistrate judge for ~~pretrial~~pre-trial supervision. On April 14, 2003, lead plaintiffs filed an amended complaint, which adds former IPALCO directors and officers John R. Hodowal, Ramon L. Humke and John R. Brehm as defendants and, in addition to the purported claims in the original complaint, purports to allege against the newly added defendants violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14a-9 promulgated thereunder. The amended complaint also purports to add a claim based on alleged misstatements or omissions concerning ~~AES’~~an alleged breach by AES of alleged obligations AES owed to Williams Energy Services Co. under an agreement between the two companies in connection with the California energy market. By ~~Order~~order dated August 25, 2003, the court consolidated these three actions with ana purported class action captioned Cole et al. v. IPALCO Enterprises, Inc. et al., 1:02-cv-01470-DFH-TAB (the “Cole Action”), which is discussed immediately below. On September 26, 2003, defendants filed a motion to dismiss the amended complaint. The motion to dismiss is pending with the court. The Company and the individual defendants believe that they have meritorious defenses to the claims asserted against them and intend to defend these lawsuits vigorously.

In September 2002, IPALCO and certain of its former officers and directors were named as defendants in ~~a purported class action filed~~the Cole Action in the United States District Court for the Southern District of ~~Indiana (the “Cole Action”).~~Indiana. The ~~lawsuit~~Cole Action purports to be filed on behalf of the class of all persons who exchanged shares of IPALCO common stock for shares of AES common stock pursuant to the ~~Registration Statement~~registration statement dated and filed with the SEC on August 16, 2000. The complaint purports to allege violations of Sections 11 of

the Securities Act of 1933 and Sections 10(a), 14(a) and 20(a) of the Securities Exchange Act of 1934, and Rules 10b-5 and 14a-9 promulgated ~~there under~~thereunder based on statements in or omissions from the ~~Registration Statement~~registration statement covering certain secured equity-linked loans by AES ~~subsidiaries,~~subsidiaries; the supposedly volatile nature of the price of AES ~~stock,~~stock; and AES’s allegedly unhedged operations in the United Kingdom. By ~~Order~~order dated August 25, 2003, the court consolidated this action with three previously filed actions, discussed immediately above. ~~The Company~~IPALCO and the individual defendants believe that they have meritorious defenses to the claims asserted against them and intend to defend the lawsuit vigorously.

In October 2002, the Company, Dennis W. Bakke, Roger W. Sant and Barry J. Sharp were named as defendants in purported class actions filed in the United States District Court for the Eastern District of Virginia. Between October 29, 2002 and December 11, 2002, seven virtually identical lawsuits were filed against the same defendants in the same court. The lawsuits purport to be filed on behalf of a class of all persons who purchased the Company’s ~~securities~~common stock and certain of its bonds between April 26, ~~2001and~~2001 and February 14, 2002. The complaints purport to allege ~~that certain statements concerning the Company’s operations in the United Kingdom violated~~violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated ~~thereunder.~~thereunder based on statements or omissions concerning the Company’s United Kingdom operations and the alleged effect of the NETA on those operations. On December 4, 2002 defendants moved to transfer the actions to the United States District Court for the Southern District of Indiana. By stipulation dated December 9, 2002, the parties agreed to consolidate these actions into one action. On December 12, 2002 the Court entered an order consolidating the cases under the caption In re AES Corporation Securities Litigation, Master File No. 02-CV-1485. On January 16, 2003, the Court granted defendants’ motion to transfer the consolidated action to the United States District Court for the Southern District of Indiana. ~~By Order dated August 25, 2003, the Southern District of Indiana recognized the previous consolidation order.~~ On September 26, 2003, plaintiffs filed a consolidated amended class action ~~complaint.~~complaint on behalf of a purported class of all persons who purchased the Company’s common stock and certain of its bonds between July 27, 2000 and November 8, 2002. The consolidated amended class action complaint, in addition to asserting the same claims asserted in the ~~orginal~~original complaints, also purports to allege

that AES and the individual defendants failed to disclose information concerning AES’s role in purported manipulation of the California electricity market, the effect thereof on ~~AES's~~AES’s reported revenues, and ~~AES's~~AES’s purported contingent legal liabilities as a result thereof, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. ~~Defendants'~~Defendants filed a motion to dismiss on November 17, 2003. The motion to dismiss is ~~currently due to be filed on November 11, 2003.~~pending with the court. The Company and the individuals believe that they have meritorious defenses to the claims asserted against them and intend to defend the lawsuit vigorously.

On December 11, 2002, the Company, Dennis W. Bakke, Roger W. Sant, and Barry J. Sharp were named as defendants in a purported class action lawsuit filed in the United States District Court for the Eastern District of Virginia captioned AFI LP and Naomi Tessler v. The AES Corporation, Dennis W. Bakke, Roger W. Sant and Barry J. Sharp, 02-CV-1811 (the ~~"AFI Action"~~“AFI Action”). The lawsuit purports to be filed on behalf of a class of all persons who purchased AES securities between July 27, 2000 and September 17, 2002. The complaint alleges that AES and the individual defendants failed to disclose information concerning purported manipulation of the California electricity market, the effect thereof on ~~AES's~~AES’s reported revenues, and ~~AES's~~AES’s purported contingent legal liabilities as a result thereof, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On May 14, 2003, the Court ordered that the action be transferred to the United States District Court for the Southern District of Indiana. By Order dated August 25, 2003, the Southern District of Indiana consolidated this action with another action captioned Stanley L. Moskal and Barbara A. Moskal v. The AES Corporation, Dennis W. Bakke, Roger W. Sant and Barry J. Sharp, 1:03-CV-0284 (the ~~"Moskal Action"~~“Moskal Action”), discussed immediately below. The Company and the individual defendants believe that they have meritorious defenses to the claims asserted against them and intend to defend the lawsuit vigorously.

On February 26, 2003, the Company, Dennis W. Bakke, Roger W. Sant, and Barry J. Sharp were named as defendants in the Moskal Action, a purported class action lawsuit filed in the United States District Court for the Southern District of Indiana captioned Stanley L. Moskal and Barbara A. Moskal v. The AES Corporation, Dennis W. Bakke, Roger W. Sant and Barry J. Sharp, 1:03-CV-0284. The lawsuit purports to be filed on behalf of a class of all persons who engaged in “option transactions” concerning AES securities between July 27, 2000 and November 8, 2002. The complaint alleges that AES and the individual defendants failed to disclose information concerning purported manipulation of the California electricity market, the effect thereof on AES’s reported revenues, and AES’s purported contingent legal liabilities as a result thereof, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. By Order dated August 25, 2003, the Southern District of Indiana consolidated this action with the AFI Action, discussed immediately above. On September 26, 2003, plaintiffs filed an amended class action complaint. ~~Defendants'~~Defendants filed a motion to dismiss on November 17, 2003. The motion to dismiss is ~~currently due to be filed on November 11, 2003.~~pending. The Company and the individual defendants believe that they have meritorious defenses to the claims asserted against them and intend to defend the lawsuit vigorously.

Beginning in September 2002, El Salvador tax and commercial authorities initiated investigations involving four of the Company’s subsidiaries in El Salvador, Compañia de Luz Electrica de Santa Ana S.A. de C.V. (“CLESA”), Compañía de Alumbrado Electrico de San Salvador, S.A. de C.V. (“CAESS”), Empresa Electrica del Oriente, S.A. de C.V. (“EEO”), and Distribuidora Electrica de Usultan S.A. de C.V. (“DEUSEM”), in relation to two ~~financial~~international loan transactions closed in June 2000 and December 2001, respectively. The authorities have issued document requests and the Company and its subsidiaries are cooperating fully in the investigations. As of March 18, 2003, certain of these investigations have been successfully concluded, with no fines or penalties imposed on the Company’s subsidiaries. As of February 2004, all investigations of CAESS, EEO and DEUSEM have been concluded with no penalties imposed. The tax authorities’ and attorney general’s investigations for CLESA are pending conclusion.

In March 2002, the general contractor responsible for the refurbishment of two previously idle units at AES’s Huntington Beach plant filed for bankruptcy in the United States bankruptcy court for the Central District of California. A number of the subcontractors hired by the general contractor, due to alleged non-payment by the general contractor, have asserted claims for non-payment against AES Huntington Beach. The general contractor has also filed claims seeking up to $57 million from AES Huntington Beach for additional costs it allegedly incurred as a result of changed conditions, delays, and work performed outside the scope of the original contract. The general contractor’s claim includes its subcontractors’ claims. All of these claims are adversary proceedings in the general contractor’s bankruptcy case. In the event AES Huntington Beach were required to satisfy any of the subcontractor claims for payment, AES Huntington Beach may be unsuccessful in recovering such amounts from, or offsetting such amounts against claims by, the general contractor. The Company does not believe that any additional amounts are owed by its subsidiary and such subsidiary intends to defend vigorously against such claims.

The U.S. Department of Justice is conducting an investigation into allegations that persons and/or entities involved with the Bujagali hydroelectric power project which the Company was constructing and developing in Uganda, have made or have agreed to make certain improper payments in violation of the Foreign Corrupt Practices Act. The Company has been conducting its own internal investigation and has been cooperating with the Department of Justice in this investigation.

In November 2002, a lawsuit was filed against AES Wolf Hollow, L.P. (“AESWH”) and AES Frontier, L.P.

(“AESF”), two of our indirect subsidiaries, in the District Court of ~~the Company, in~~Hood County, Texas ~~State Court~~ by Stone ~~and~~& Webster, Inc. ~~The complaint in~~(“S&W”). S&W contracted to complete the ~~action alleges claims for declaratory judgment~~engineering, procurement and ~~breach of contract allegedly arising out of the denial of certain force majeure claims purportedly asserted by the plaintiff in connection with its~~ construction of the Wolf Hollow project, a gas-fired combined cycle power plant ~~being constructed~~ in Hood County, Texas. ~~Stone~~In its initial complaint, S&W requested a declaratory judgment that a fire that took place at the project on June 16, 2002 constituted a force majeure event and ~~Webster is~~that S&W was not required to pay rebates assessed for associated delays. As part of the ~~general contractor for~~initial complaint, S&W also sought to enjoin AESWH and AESF from drawing down on letters of credit provided by S&W. The Court refused to issue the ~~Wolf Hollow project. On May 2, 2003 plaintiff~~injunction. S&W has since amended its complaint three times and joined additional parties, in addition to ~~assert additional~~the claims ~~based on purported acts of fraud, negligent misrepresentation and breach of warranty. On July 3, 2003, Stone and Webster filed a third amended complaint, which complaint asserted~~already mentioned, the current claims ~~against the Company. The alleged~~by S&W include claims ~~against the Company are~~ for ~~purported~~ breach of warranty, wrongful liquidated damages, foreclosure of lien, fraud and negligent misrepresentation. ~~The claims asserted against~~In January 2004, the Company ~~seek~~filed a counterclaim against S&W and its parent, the Shaw Group, Inc. (“Shaw”). In February 2004, Shaw filed an ~~unspecified damage amount. Discovery is ongoing in~~answer to the ~~lawsuit.~~complaint. The ~~subsidiary~~Company and ~~the Company~~subsidiaries believe that ~~they~~each have meritorious defenses to the claims asserted ~~against them~~by S&W, and intend to defend the lawsuit vigorously. Trial in this matter is set for March 7, 2005.

In March 2003, the office of the Federal Public Prosecutor for the State of Sao Paulo, Brazil (“MPF”) notified Eletropaulo that it had commenced an inquiry related to the BNDES financings provided to AES Elpa and AES Transgas and the rationing loan provided to Eletropaulo, changes in the control of Eletropaulo, sales of assets by Eletropaulo and the quality of service provided by Eletropaulo to its customers and requested various documents from Eletropaulo relating to these matters. ~~The Company is still in the process of collecting some of the requested documents concerning the real estate sales to provide~~In October 2003 this inquiry was sent to the ~~Public Prosecutor.~~MPF for continuing investigation. Also in March 2003, the Commission for Public Works and Services of the Sao Paulo Congress requested Eletropaulo to appear at a hearing concerning the default by AES Elpa and AES Transgas on the BNDES financings and the quality of service rendered by Eletropaulo. This hearing was postponed indefinitely.

In addition, in April 2003, the office of the ~~Federal Public Prosecutor for the State of Sao Paulo, Brazil~~MPF notified Eletropaulo that it is conducting an inquiry into possible errors related to the collection by Eletropaulo of customers’ unpaid past-due debt and requesting the company to justify its procedures. In December 2003, ANEEL answered, as requested by the MPF, that the issue regarding the past-due debts are to be included in the analysis to the revision of the “General Conditions for the Electric Energy Supply”, which will be performed during 2004.

In May 2003, there were press reports of allegations that in April 1998 Light Serviços de Eletricidade S.A. (“Light”) colluded with Enron in connection with the auction of ~~the Brazilian group Eletropaulo Electricidade de Sao Paulo S.A.~~Eletropaulo. Enron and Light ~~of which AES was a shareholder,~~ were among three potential bidders for Eletropaulo. At the time of the transaction in 1998, AES owned less than 15% of the stock of Light and shared representation in Light’s management and Board with three other shareholders. In June 2003, the Secretariat of Economic Law for the Brazilian Department of Economic Protection and Defense (“SDE”) issued a notice of a preliminary investigation seeking information from a number of entities, including AES Brasil Energia, with respect to certain allegations arising out of the privatization of Eletropaulo. On August 1, 2003, AES Elpa ~~S.A.~~ responded on behalf of AES-affiliated companies and denied knowledge of these allegations. The SDE ~~has begun~~began a follow-up administrative proceeding as reported in a notice published on October 31, 2003. In response to the Secretary of Economic Law’s official letters requesting explanations on such accusation, AES Eletropaulo filed its defense on January 19, 2004. Since then, defendants’ responses are being reviewed by the Secretariat of Economica Law.

In December 2002, Enron filed a lawsuit in the Bankruptcy Court for the Southern District Court of New York against the Company, NewEnergy, and CILCO. Pursuant to the complaint, Enron seeks to recover approximately $13 million (plus interest) from NewEnergy (and the Company as guarantor of the obligations of NewEnergy). Enron contends that NewEnergy and the Company are liable to Enron based upon certain accounts receivables purportedly owing from NewEnergy and an alleged payment arising from the purported termination by NewEnergy of a “Master Energy Purchase and Sale Agreement.” In the complaint, Enron seeks to recover from CILCO the approximate amount of $31.5 million (plus interest) arising from the termination by CILCO of a “Master Energy Purchase and Sale Agreement” and certain accounts receivables that Enron claims are due and owing from CILCO to Enron. On February 13, 2003 the Company, NewEnergy and CILCO filed a motion to dismiss certain portions of the action and compel arbitration of the disputes with Enron. Also in February 2003, the Bankruptcy Court ordered the parties to mediate the disputes. The mediation process is currently continuing. The Company believes it has meritorious defenses to the claims asserted against it and intends to defend the lawsuits vigorously.

~~In December 2002, plaintiff David Schoellermann filed a purported derivative lawsuit in Virginia State Court~~Commencing on behalf of the Company against the members of the Board of Directors and numerous officers of the Company (the “Schoellermann Lawsuit”). The lawsuit alleges that defendants breached their fiduciary duties to the Company by participating in or approving the Company’s alleged manipulation of electricity prices in California. Certain of the defendants are also alleged to have engaged in improper sales of stock

based on purported inside information that the Company was manipulating the California electricity prices. The complaint seeks unspecified damages and a constructive trust on the profits made from the alleged insider sales. On February 21, 2003, a second derivative lawsuit was filed by plaintiff Joe Pearce in Virginia State Court on behalf of the Company against the members of the Board of Directors and numerous officers of the Company (the “Pearce Lawsuit”). In June 2003, a motion to stay the Schoellermann Lawsuit pending a review of the allegations asserted in the Schoellermann Lawsuit by a special committee of the Company comprised of two independent directors was granted by the Court. In July 2003, the Court issued a consent order further extending the stay of the

~~proceedings until October 8, 2003. The parties recently informed the Court that they have reached a settlement of the case and are preparing appropriate documentation.~~

On February 26, 2003, the Company, Dennis W. Bakke, Roger W. Sant, and Barry J. Sharp were named as defendants in a purported class action lawsuit filed in the United States District Court for the Southern District of Indiana captioned ~~Stanley L. Moskal and Barbara A. Moskal v. The AES Corporation, Dennis W. Bakke, Roger W. Sant and Barry J. Sharp~~, 1:03-CV-0284 (Southern District of Indiana). The lawsuit purports to be filed on behalf of a class of all persons who engaged in “option transactions” concerning AES securities between July 27, 2000 and November 8, 2002. The complaint alleges that AES and the individual defendants failed to disclose information concerning purported manipulation of the California electricity market, the effect thereof on AES’s reported revenues, and AES’s purported contingent legal liabilities as a result thereof, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. By Order dated August 25, 2003, the Southern District of Indiana consolidated this action with the AFI Action, discussed immediately above. The Company and the individual defendants believe that they have meritorious defenses to the claims asserted against them and intend to defend the lawsuit vigorously.

On April 16, 2003, Lake Worth Generation, LLC (“Lake Worth”) commenced a voluntary proceeding under Chapter 11 of the United States Bankruptcy Court for the Southern District of Florida (the “Bankruptcy Court”). As a debtor in possession, Lake Worth continues to manage its affairs and operate its business. No trustee or examiner has been appointed for Lake Worth. Lake Worth has been constructing a combined cycle power generation facility in the City of Lake Worth (the “Project”). Lake Worth intended to install a single combustion turbine and heat recovery steam generator, along with a new 47 MW steam turbine, to produce approximately 205 MW of electricity for the residents of Lake Worth. Construction began in June 2001 under an EPC agreement with NEPCO, a subsidiary of Enron, who provided the financial guaranty in support of the EPC performance obligations. AES holds secured claims against Lake Worth of approximately $2.8 million. Lake Worth contemplates that it will sell the Project pursuant to procedures approved by the Bankruptcy Court. There are parties undertaking due diligence on the Project.

On May 2, 2003, the Indiana Securities Commissioner of ~~Indiana's~~Indiana’s Office of the Secretary of

State, Securities Division, pursuant to Indiana Code 23-2-1, served subpoenas on 30 former officers and directors of IPALCO Enterprises, Inc. ~~("IPALCO"~~(“IPALCO”), AES, and others, requesting the production of documents in connection with the March 27, 2001 share exchange between the Company and IPALCO pursuant to which stockholders exchanged shares of IPALCO common stock for shares of the ~~Company's~~Company’s common stock and IPALCO became a wholly-owned subsidiary of the Company. ~~A subsequent subpoena was issued to IPALCO.~~ IPALCO ~~has~~and the Company have produced documents pursuant to the ~~subpoena.~~subpoenas served on them. In addition, the Indiana Securities Commissioner’s office has taken testimony from various individuals. On ~~September 4, 2003,~~January 27, 2004, Indiana’s Secretary of State issued a statement which provided that the investigative staff had determined that there did not appear to be a justifiable reason to focus further specific attention upon six non-employee former members of IPALCO’s board of directors. The investigation otherwise remains pending. In addition, although the press release characterized the investigation as criminal, the Company and IPALCO do not believe that the Indiana Securities Commissioner ~~served~~has criminal jurisdiction, and the Company and IPALCO are unaware at this time of any participation by any government office or agency with such criminal jurisdiction.

AES Florestal, Ltda., (“Florestal”) a ~~subpoena~~wholly-owned subsidiary of AES Sul, is a wooden electric utility poles factory located in Triunfo, in the state of Rio Grande do Sul, Brazil. In October 1997 AES Sul acquired Florestal as part of the original privatization transaction by the Government of the State of Rio Grande do Sul, Brazil, that created AES Sul. From 1997 to the present, the chemical compound chromated copper arsenate has been used by Florestal to chemically treat the poles under an operating license issued by the Brazilian government. Prior to the acquisition of Florestal by AES Sul, another chemical, creosote, was used to treat the poles. After acquiring Florestal, AES Sul discovered approximately 200 barrels of solid creosote waste on the Florestal property. In 2002 a civil inquiry (Civil Inquiry No. 02/02) was initiated and a criminal lawsuit was filed in the city of Triunfo’s Judiciary both by the Public Prosecutors office of the city of Triunfo. The civil lawsuit was settled in 2003. The criminal lawsuit has been suspended for a period of two years pending a certification of environmental compliance for Florestal and the occurrence of no further violations of environmental regulations. Florestal has hired an independent environmental assessment company to perform an environmental audit of the entire operational cycle at Florestal and to recommend remedial actions if necessary. Pending the outcome of the environmental audit, AES Sul is not able to estimate the potential financial impact, if any, on AES Sul.

AES Ekibastusz LLP (“AES Ekibastusz”), a subsidiary of the Company, is involved in litigation in Kazakhstan concerning the Maikuben coal mine. AES Ekibastusz is the operator of the AES Ekibastusz power plant located in Kazakhstan. The coal mine was acquired in 2001 and provides coal to the power plant. Because the mine was in bankruptcy proceedings at the time of acquisition, AES Ekibastusz provided approximately US$20 million of financial assistance to the mine and acquired indirect ownership of the mine, as provided in Kazakhstan’s bankruptcy legislation. That acquisition was later disputed by several creditors of the mine. After litigation, AES Ekibastusz was successful in having the creditor’s claims dismissed by the Kazakhstan courts. In 2003, a new party filed a lawsuit in the local courts of Kazakhstan, claiming that it had succeeded to the rights of one of the creditors whose claims had been dismissed. The plaintiff in the pending lawsuit seeks to have ownership of the coal mine transferred from AES Ekibastusz to the plaintiff.

On January 27, 2004, the Company received notice of a “Formulation of Charges” filed against the Company by the Superintendence of Electricity of the Dominican Republic. In the “Formulation of Charges”, the Superintendence asserts that the existence of three-generation companies (Empresa Generadora de Electricidad Itabo, S.A., Dominican Power Partners, and AES Andres BV) and one distribution company (Empresa Distribuidora de Electricidad del Este, S.A.) in the Dominican Republic, violates certain antitrust provisions of the General Electricity law of the Dominican Republic. On February 10, 2004, the Company filed in the First Instance Court of the National District of the Dominican Republic (the “Court”) an action seeking injunctive relief based on several constitutional due process violations contained in the “Formulation of Charges” (the “Constitutional Injunction”). On or about February 24, 2004, the Court granted the Constitutional Injunction and ordered the immediate cease of any effects of the “Formulation of Charges” and the enactment by the Superintendence of Electricity of a special procedure to prosecute alleged antitrust complaints under the General Electricity Law. On March 1, 2004, the Superintendence of Electricity appealed the Court’s decision. The appeal is pending.

On February 18, 2004, AES Gener S.A. (“Gener SA”), a subsidiary of the Company, filed a lawsuit in the Federal District Court for the Southern District of New York (the “Lawsuit”). Gener SA is co-venturer with

Coastal Itabo, Ltd. (“Coastal”) in Empressa Generadora de Electricidad Itabo, S.A. (“Itabo”), a Dominican Republic electric generation Company. The lawsuit sought to enjoin the efforts initiated by Coastal to hire an alleged “independent expert,” purportedly pursuant to the Shareholder Agreement between the parties, to perform a valuation of Gener SA’s aggregate interests in Itabo. Coastal asserts that Gener SA has committed a material breach under the parties’ Shareholder Agreement and, therefore, Gener is required if requested by Coastal to sell its aggregate interests in Itabo to Coastal at a price equal to 75% of the independent expert’s valuation. Coastal claims a breach occurred based on alleged violations by Gener SA of purported antitrust laws of the Dominican Republic. Gener SA disputes that any default has occurred. On March 11, 2004, upon motion by Gener SA, the court in the Lawsuit enjoined the evaluation being performed by the “expert” and ordered the parties to arbitration. On March 11, 2004, Gener SA commenced arbitration proceedings. The arbitration is ongoing.

Pursuant to the pesification established by the Public Emergency Law and related decrees in Argentina, since the beginning of 2002, the Company’s subsidiary TermoAndes has converted its obligations under its gas supply and gas transportation contracts into pesos, while its income from its electricity exports remains accounted for in U.S. Dollars. In accordance with the Argentine regulations, payments must be made in Argentine Pesos at a 1:1 exchange rate. The gas suppliers have objected to the payment in pesos. On January 30, 2004, the consortium of gas suppliers, comprised of Tecpetrol S.A., Mobil Argentina S.A. and Compania General de Combustibles S.A., presented a demand for arbitration at the ICC (International Chamber of Commerce) requesting the ~~production~~re-dollarization of ~~documents.~~the gas price. The ~~Company is in~~arbitration seeks approximately $10,000,000 for past gas supplies. On March 11, 2004, TermoAndes filed with the ~~process of producing documents responsive~~ICC a response to the ~~subpoena. On September 30, 2003, the Indiana Securities Commissioner served a supplemental subpoena on IPALCO, and IPALCO~~arbitration demand. The arbitration is ~~in the process of producing documents responsive to the supplemental subpoena.~~ongoing.

The Company is also involved in certain claims, suits and legal proceedings in the normal course of business. The Company has accrued for litigation and claims where it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company believes, based upon information it currently possesses and taking into account established reserves for estimated liabilities and its insurance coverage that the ultimate outcome of these proceedings and actions is unlikely to have a material adverse effect on the Company’s financial statements. It is possible, however, that some matters could be decided unfavorably to the Company, and could require the Company to pay damages or to make expenditures in amounts that could be material but cannot be estimated as of March 31, 2004.

~~9. Comprehensive Income (Loss)~~GUARANTEES, LETTERS OF CREDITS— At March 31, 2004, AES had provided outstanding financial and performance related guarantees or other credit support commitments to or for the benefit of its subsidiaries, which were limited by the terms of the agreements, to an aggregate of approximately $340 million (excluding those collateralized by letter-of-credit obligations discussed below). The above guarantees and commitments do not include obligations made by the Company for the benefit of the lenders associated with the non-recourse debt of subsidiaries recorded as liabilities in the accompanying consolidated balance sheet amounting to $147 million, and commitments to fund its equity in projects currently under development or in construction in the amount of $38 million.

At March 31, 2004, the Company had $98 million in letters of credit outstanding, which operate to guarantee performance relating to certain project development activities and subsidiary operations. Of these letters of credit, $79 million were provided under the Company’s revolver. The Company pays a letter-of-credit fee ranging from 0.50% to 5.00% per annum on the outstanding amounts. In addition, the Company had $4 million in surety bonds outstanding at March 31, 2004.

RISKS RELATED TO FOREIGN CURRENCIES —AES operates businesses in many foreign environments. Investments in foreign countries may be impacted by significant fluctuations in foreign currency exchange rates. The Company’s financial position and results of operations have been significantly affected by fluctuations in the value of the Argentine Peso, Brazilian Real and Venezuelan Bolivar relative to the U.S. Dollar.

Depreciation of the Argentine Peso and Brazilian Real has resulted in foreign currency translation and transaction losses. Appreciation of those currencies has resulted in gains. Conversely, depreciation of the Venezuelan Bolivar has resulted in foreign currency gains and appreciation has resulted in losses. Net foreign currency transaction gains (losses) at the Company’s subsidiaries and affiliates in Argentina, Brazil and Venezuela were as follows (in millions):

(1) Includes $(6) million and $5 million in the first quarter 2004 and 2003, respectively, of (losses) gains on foreign currency forward and swap contracts.

On March 31, 2004, the Under-Secretariat of Fuels issued Rule 27/04, the Rationing Program for natural Gas Exports and Use of Transportation Capacity (the “Program”), which, in order to ensure the natural gas supply to the Argentine market, imposes restrictions on natural gas exports, natural gas supplies used for electric generation exports and natural gas transportation services utilized for export. The Program established that natural gas exports from each producer in 2004 are to be limited to the amount exported in the same month in 2003, and additionally, that cumulative exports during the nine-month period from January to September 2004 cannot exceed the amount exported by the same producer during the same nine-month period in 2003. Gas suppliers that do not fulfill their supply obligations in the Argentine market are also subject to export restrictions, and penalties are to be levied against gas suppliers who do not comply with the requirements of this regulation. Currently, a number of gas suppliers are seeking an exemption from certain of the restrictions applied in the Program.

AES Gener’s subsidiary, TermoAndes, located in Argentina, utilizes natural gas in its Salta power facility to produce electricity which is currently exported to Chile. As a result of the new regulation, TermoAndes received restrictions on natural gas quantities from several of its gas suppliers, which has resulted in a reduction in generation. TermoAndes, as a result, has commissioned its liquid fuel oil burning system to minimize this impact, and to date, there has been no reduction in capacity payments received by AES Gener from the sale of the power produced by TermoAndes. Also, Electrica Santiago, an AES Gener subsidiary in Chile, owns and operates the Nueva Renca facility, a natural gas fired combined cycle plant in Chile, which utilizes natural gas exported from Argentina.

AES Uruguaiana, located in Brazil, also utilizes natural gas purchased from Argentina to generate its electricity. On May 4, 2004, AES Uruguaiana was notified that for the remainder of the year, its natural gas purchases from Argentina would be restricted to the 2003 quantities. The Company is currently pursuing contracts or hedging agreements to obtain the required energy purchases to meet its power sales agreement obligations. To the extent that such contracts or hedging agreements are not obtained, there is a risk that they would have to purchase this energy on the spot market at higher prices.

The impact of gas restrictions on Gener, Gener’s subsidiaries and AES Uruguaiana is uncertain. Any additional or new interruptions and/or reductions in the supply and transportation of natural gas in Argentina or from Argentina to neighboring countries could have a direct adverse effect on the operation of these businesses.

The components of comprehensive income ~~(loss)~~ for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2004 and 2003 ~~and 2002~~ are as follows (in millions):

~~The components of accumulated other comprehensive loss at September 30, 2003 and December 31, 2002 are as follows:~~

We report our financial results in four business segments of the electricity industry: large utilities, growth distribution, contract generation, and competitive supply. Our large utility segment consists of three large utilities located in the U.S. (IPL), Brazil (Eletropaulo) and Venezuela (EDC). All three of these utilities are of significant size and all maintain a monopoly franchise within a defined service area. Our growth distribution segment consists of distribution facilities located in developing countries where the demand for electricity is expected to grow at a higher rate than in more developed parts of the world. Our contract generation segment consists of facilities that have contractually limited their exposure to commodity price risks and electricity price volatility by entering into long-term (five years or longer) power sales agreements for 75% or more of their output capacity. These contractual agreements generally allow our contract generation businesses to reduce their exposure from the commodity and electricity price volatility and thereby increase the predictability of their cash flows and earnings. Competitive supply consists primarily of power plants selling electricity to wholesale customers through competitive markets, and as a result, the cash flows and earnings of such businesses are more sensitive to fluctuations in the market price of electricity, natural gas and coal.

Information about the Company’s operations by segment is as follows (in millions):

(1) Intersegment revenues for the quarters ended ~~September 30,~~March 31, 2004 and 2003 ~~and 2002~~ were ~~$128~~$102 million and ~~$54~~$55 million, ~~respectively, and $297 and $142 for the nine months ended September 30, 2003 and 2002,~~ respectively.

~~11.~~10. ~~Change in Accounting Principle and New Accounting Pronouncements~~CHANGE IN ACCOUNTING PRINCIPLE

Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standard ~~(SFAS)~~(“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires entities to record the fair value of a legal liability for an asset retirement obligation in the period in which it is incurred. When a new liability is recorded, ~~beginning in 2003,~~ the ~~entity will capitalize~~Company capitalizes the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, ~~an entity settles~~the company will settle the obligation for its recorded amount or ~~incurs~~incur a gain or loss upon settlement.

The Company’s retirement obligations covered by SFAS No. 143 primarily include active ash landfills, water treatment basins and the removal or dismantlement of certain plant and equipment. As of December 31, 2002, the Company had a recorded liability of approximately $15 million related to asset retirement obligations. Upon adoption of SFAS No. 143 on January 1, 2003, the Company recorded an additional liability of approximately $13 million, a net asset of approximately $9 million, and a cumulative effect of a change in accounting principle of approximately $2 million, after income taxes. ~~Amounts recorded related to asset retirement obligations during the nine month period ended September 30, 2003 were as follows (in millions):~~

Proforma net income (loss) and earnings (loss) per share have not been presented for the three and nine months ended September 30, 2002 because the proforma application of SFAS No. 143 to the prior period would result in proforma net income (loss) and earnings (loss) per share not materially different from the actual amounts reported in the accompanying consolidated statement of operations. The proforma liability for asset retirement obligations would have been $28 million, $23 million and $21 million as of December 31, 2002, 2001 and 2000, respectively if SFAS No. 143 had been applied during those periods.

~~Stock-based compensation.~~ As of January 1, 2003 the Company had two stock-based compensation plans, which are described more fully in Note 14 to the Company’s consolidated financial statements for the year ended December 31, 2002 contained in the Company’s Current Report on Form 8-K filed on June 13, 2003. Prior to 2003, the Company accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in the net income for the three and nine months ended

~~September 30,~~11. 2002, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provision of SFAS No. 123, as amended by SFAS No. 148, prospectively to all employee awards granted, modified or settled after January 1, 2003. Awards under the Company’s plans generally vest over two years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the three and nine months ended September 30, 2003, is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. However, if SFAS No. 123 had been applied to all grants since the original effective date the impact on net income would have been minimal since there were very few grants that would have had expense carried over to 2003. During the nine months ended September 30, 2003, the Company recorded compensation expense of approximately $5 million as a result of adopting SFAS No. 148. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period (in millions, except per share amounts):

~~Guarantor accounting.~~ During the fourth quarter of 2002, the Company adopted the disclosure provisions of FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others.” Effective January 1, 2003, the Company began applying the initial recognition and measurement provisions on a prospective basis for all guarantees issued after December 31, 2002, which require the Company to record the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. The Company will account for any fundings under the guarantee as a reduction of the liability. In general, the Company enters into various agreements providing financial performance assurance to third parties on behalf of certain subsidiaries. Such agreements include guarantees, letters of credit and surety bonds. FIN 45 does not encompass guarantees issued either between parents and their subsidiaries or between corporations under common control, a parent’s guarantee of its subsidiary’s debt to a third party (whether the parent is a corporation or an individual), a subsidiary’s guarantee of the debt owed to a third party by either its parent or another subsidiary of that parent, nor guarantees of a Company’s own future performance. Adoption of FIN 45 had no impact on the Company’s historical financial statements as guarantees in existence at December 31, 2002 were not subject to the measurement provisions of FIN 45. The Company has recorded a liability of approximately $9 million as a result of applying the initial recognition and measurement provisions of FIN 45 during the first quarter of 2003. This liability relates to an indemnification provided to the buyer of a discontinued business. NEW ACCOUNTING PRONOUNCEMENTS

~~Variable interest entities.~~In January 2003, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 46, ~~(“FIN 46”),~~ “Consolidation of Variable Interest ~~Entities.”~~Entities — An Interpretation of ARB No. 51” (“FIN 46” or “Interpretation”). FIN 46 ~~was immediately effective for all~~is an interpretation of Accounting Research Bulletin 51, “Consolidated Financial Statements,” and addresses consolidation by business enterprises ~~with variable interests in~~of variable interest entities ~~created after January 31, 2003. AES has elected to apply the FIN 46 provisions to variable interests in variable interest entities created before February 1, 2003 from the end~~(“VIE”). The primary objective of the ~~fourth quarter~~Interpretation is to provide guidance on the identification of, ~~2003. If~~and financial reporting for, entities over which control is achieved through means other than voting rights; such entities are known as VIEs. The Interpretation requires an ~~entity is determined~~enterprise to beconsolidate a VIE if that enterprise has a variable interest ~~entity, it must be consolidated by the enterprise~~ that ~~absorbs the~~will absorb a majority of the entity’s expected losses if they occur, ~~and/or if it receives~~receive a majority of the entity’s expected residual returns if they ~~occur. The adoption of FIN 46 did not result~~occur or both. An enterprise shall consider the rights and obligations conveyed by its variable interests in the consolidation of any previously unconsolidated entities nor require material additional disclosure. Applying FIN 46 in the fourth quarter of 2003 is expected to result in the deconsolidation of the special purpose business trusts that issued the Tecons.making this determination.

~~DIG Issue C11.~~ In connection with the January 2003 FASB Emerging Issues Task Force (EITF) meeting, the FASB was requested to reconsider an interpretation of SFAS No. 133. The interpretation, which is contained in the Derivatives Implementation Group’s C11 guidance, relates to the pricing of power sales contracts that include broad market indices. In particular, that guidance discusses whether the pricing in a power sales contract that contains broad market indices (e.g. CPI) could qualify as a normal purchase or sale. In JuneOn December 24, 2003 the FASB issued ~~DIG Issue C20~~Interpretation No. 46 (Revised 2003) Consolidation of Variable Interest Entities (“FIN 46(R)” or “Interpretation”), which ~~superceded DIG Issue C11~~partially deferred the effective date of FIN 46 for certain entities, and ~~provided additional guidance~~makes several other major changes to FIN 46 which include a more complete definition of variable interest, and an exemption for many entities defined as businesses in ~~this area. Under DIG Issue C20,~~ the Interpretation.

The Company ~~will record a cumulative effect of change~~applied FIN 46 in ~~accounting principle~~its financial statements relating to ~~report the power sales contract at AES Shady Point at fair value~~its interest in variable interest entities or potential variable interest entities as of ~~October 1,~~December 31, 2003 and applied FIN 46(R) as of March 31, 2004. The application of FIN 46(R) did not have an impact on the Company’s consolidated financial statements for the quarter ended March 31, 2004.

In March 2004, the FASB issued, as a proposal, FASB Staff Position (“FSP”) 106-b “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” When issued in final form, this guidance will supersede FSP 106-1 issued in January 2004 and will clarify the accounting and disclosure requirements for employers with postretirement benefit plans that have been or will be affected by the passage of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (“the Act”). The Act introduces two new features to Medicare that an employer needs to consider in measuring its obligation and net periodic postretirement benefit costs. The effective date for the new requirements is the first interim or annual period beginning after June 15, 2004.

One of the Company’s subsidiaries maintains a retiree health benefit plan that currently includes a prescription drug benefit that is provided to retired employees. The Company is currently evaluating the effects that FSP 106-b will have on its results of operations and financial position. The Company does not believe the application of this new requirement will have a material impact on its financial statements, although the magnitude of the impact cannot be determined with any degree of certainty at this time.

~~Equity offering.~~AES Elpa and AES Transgas. On ~~June 23,~~December 22, 2003 the Company ~~completed an offering~~concluded negotiations with the Brazilian National Development Bank (“BNDES”) and its wholly owned subsidiary, BNDES Participações S.A. (“BNDESPAR”), to restructure the outstanding indebtedness of ~~49,450,000~~the Company’s Brazilian subsidiaries AES Transgas and AES Elpa, the holding companies of Eletropaulo (“BNDES Debt Restructuring”). On January 19, 2004 and on January 23, 2004, approval was received on the BNDES Debt Restructuring from ANEEL and the Brazilian Central Bank, respectively. The transaction became effective on January 30, 2004 after the required approvals were obtained and a payment of $90 million was made by AES to BNDES.

Under the BNDES Debt Restructuring, all of the Company’s equity interests in Eletropaulo, AES Uruguaiana Empreendimentos Ltda. (“AES Uruguaiana”) and AES Tiete S.A. (“AES Tiete”) were transferred to Brasiliana Energia, S.A. (“Brasiliana Energia”), a holding company created for the debt restructuring. The debt at AES Elpa and AES Transgas was also transferred to Brasiliana Energia.

In exchange for the termination of $869 million of outstanding Brasiliana Energia debt and accrued interest, BNDES received $90 million in cash, 53.85% ownership of Brasiliana Energia, and a call option (the “Sul Option”). The Sul Option which would require the Company to contribute its equity interest in AES Sul to Brasiliana Energia, will be exercisable at the Company’s announcement to BNDES of the completion of the AES Sul restructuring or June 22, 2005, subject to a six month extension under certain circumstances. The debt refinancing was accounted for as a modification of a debt instrument; therefore, the $26 million of face value of remaining debt due in excess of carrying value will be amortized using the effective interest rate method over the life of the debt.

To effect the new ownership structure, Brasiliana Energia issued 50.01% of its common shares to AES and the remainder to BNDES. It also issued a majority of its non-voting preferred shares to BNDES. As a result, BNDES effectively owns 53.85% of the total capital of Brasiliana Energia. Pursuant to the shareholders’ agreement, AES controls Brasiliana Energia through its ownership of a majority of the voting shares of ~~common stock at $7.00 per share for net proceeds of approximately $335 million. The Company used $75 million~~the company.

As a result of the ~~proceeds~~stock issuance, AES recorded minority interest for BNDES’s share of Brasiliana Energia of $329 million. In addition, the estimated fair value of the Sul Option was recorded as a liability in the amount of $37 million and will be marked to ~~prepay~~market in future quarters to reflect the changes in the underlying value of AES Sul, prior to BNDES’S exercise or the expiration of its call option.

AES treated the issuance of new shares in Brasiliana Energia to BNDES as a capital transaction in accordance with Staff Accounting Bulletin No. 51 “Accounting for Sales of Stock by a Subsidiary”. The net loss of $442 million has been reported as an adjustment to AES’s additional paid-in capital on the consolidated balance sheet. The net loss includes the write-off of amounts previously recorded through accumulated other comprehensive loss related to that portion of the ~~secured equity-linked loan issued by AES New York Funding LLC.~~Company’s investment which was effectively transferred to BNDES (53.85% of Brasiliana Energia). The ~~remaining proceeds were used for general corporate purposes, including the repayment or repurchase of debt.~~write-offs included $769 million related to currency translation losses and $86 million related to minimum pension liability adjustments. See Note 8 “Comprehensive (Loss) Income”.

~~Consent solicitation and private placement.~~ On April 3, 2003, AES successfully completed a consent solicitation to amend the definition of “Material Subsidiary” and certain other provisions in its outstanding senior and senior subordinated notes to conform those provisions to the provisions of its 10% senior secured notes. On May 8, 2003, AES completed a $1.8 billion private placement of second priority senior secured notes. The second priority senior secured notes were issued in two tranches: $1.2 billion aggregate principal amount of 8 3/4% second priority senior secured notes due 2013 and $600 million aggregate principal amount of 9% second priority senior secured notes due 2015. The net proceeds were used by AES to (i) repay $475 million of debt outstanding under its senior secured credit facilities, (ii) to repurchase approximately $1.1 billion aggregate principal amount of its senior notes pursuant to a tender offer, (iii) to repurchase approximately $104 million aggregate principal amount of its senior subordinated notes pursuant to a tender offer and (iv) for general corporate purposes, which included repurchasing other outstanding securities. AES also amended its senior secured credit facilities to permit the private placement and tender offer described above and to provide certain additional changes under the covenants contained therein.

~~Debt retirement.~~ On June 30, 2003, the Company repurchased 1,357,900 shares of its outstanding 6.00% Term Convertible Preferred Securities 2008 (the "TECONS") for approximately $58 million. At the time of the transaction, the TECONS had a face value of approximately $68 million, and the resulting gain of approximately $10 million is included in other income in the consolidated statements of operations for the nine month period ended September 30, 2003.

During the third quarter of 2003, the Company repurchased 2,004,520 shares of TECONS for approximately $80 million. At the time of the transactions, the TECONS had a face value of approximately $100 million, and the resulting gain of approximately $20 million is included in other income in the consolidated statements of operations for the three and nine month periods ended September 30, 2003.

On July 29, 2003, the Company called for redemption all $198 million aggregate principal amount of its outstanding 10.25% Senior Subordinated Notes due 2006. The notes were redeemed on August 28, 2003 at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the redemption date.

~~Amended and restated bank facilities~~. On July 29, 2003 the Company closed its amended and restated senior secured bank credit facilities providing for a $250 million revolving loan and letter of credit facility and a $700 million term loan facility. Loans under the amended facilities bear a floating interest rate at either LIBOR plus 4% or a base rate plus 3%, and maturity of the bank credit facilities has been extended to July 31, 2007. The total amount of credit available under the amended facilities was increased by approximately $135 million to $950 million. This increase, together with cash on hand, was used to repay in full the $150 million balance of the AES New York Funding SELLS loan, resulting in the release of all of the unregistered common stock of AES and other collateral that had secured such loan. The AES Corporation on January 6, 2003 and February 25, 2003 authorized AES Eastern Energy, L.P. to issue letters of credit to counterparties on its $250 million senior secured revolving credit facility up to the amount of $25 million and $35 million for the years of 2003 and 2004, respectively. As of June 30, 2003, AES Eastern Energy, L.P. has obtained letters of credit of $9.7 million, which have been provided as additional margin to support normal, ongoing hedging activities with a number of counterparties.

~~Subsidiary financings~~~~. On August 22, 2003, the Company completed a project financing~~The remaining outstanding debt owed to BNDESPAR by Brasiliana Energia includes approximately $510 million of ~~$890 million for a wholly-owned 1,200MW combined cycle gas-fired power plant located in Cartagena, Spain~~convertible debentures, non-recourse to AES (the ~~"Cartagena Project"~~“Convertible Debentures”). The ~~project is fully contracted for~~Convertible Debentures bear interest at a nominal rate of 9.0% per annum, and an effective rate of 9.67% indexed in U.S. dollars, and will amortize over an 11- year period with principal repayments beginning in 2007. Principal payments of $20 million, $45 million and $445 million will be due in 2007, 2008 and thereafter. Brasiliana Energia may not pay any dividends until 2007, at which point it may pay dividends up to ~~24 years, and full commercial operation is expected by early 2006.~~10% of its available cash to its shareholders.

In ~~June 2003, AES China Generating Co. Ltd. (“Chigen”),~~the event of a ~~wholly-owned subsidiary~~default under the Convertible Debentures, the debentures can be converted by BNDESPAR into common shares of Brasiliana Energia in an amount sufficient to give BNDESPAR operational and managerial control of Brasiliana Energia. Under the terms of the BNDES Debt Restructuring, the Company ~~completed a $175 million bond refinancing. Chigen is a leading independent power generation company in~~will, subject to certain protective rights granted to BNDESPAR under the ~~Peoples Republic~~Restructuring Documents, retain operational and managerial control of ~~China~~Eletropaulo, AES Uruguaiana and ~~is one of~~AES Tiete as long as no default under the ~~few international developers to successfully complete the development of electric power plants in the country.~~

In July 2003, AES announced that its wholly-owned subsidiary, AES Hawaii, Inc. (“AES Hawaii”), completed a non-recourse refinancing of its existing debt through the private placement of $500 million in senior secured notes,Convertible Debentures occurs. The default and ~~obtained a $25 million letter of credit facility. AES Hawaii is a 180 MW coal-fired power plant located~~penalty interest accrued on the ~~island of Oahu in Kapolei, Hawaii, which commenced commercial operations in September 1992. As a result of~~AES Transgas and AES Elpa debt will be pro rata forgiven as Brasiliana Energia makes timely payments on the ~~refinancing, AES received net cash proceeds of approximately $24 million.~~

~~AES Gener is currently pursuing a plan to refinance $700 million of its indebtedness that matures in 2005~~new debt. If Brasiliana Energia does not make timely payments on the Convertible Debentures, this default and ~~2006 through a combination of (i) a capital increase of up to $80 million, (ii) the issuance of $400 million of long-term indebtedness~~penalty interest would be immediately due and (iii) the contribution by AES to AES Gener's capital of $300 million. AES's capital contribution is expected to be funded in part from the sale of a non-controlling portion of the shares of AES Gener owned indirectly by AES. None of the financing is committed, so there can be no assurance that the refinancing will occur upon these terms or at all.

On April 4, 2003, the Company established a Global Insurance Program comprised of a captive insurance company (AES Global Insurance Company (“AES Global Insurance”), a wholly owned subsidiary of AES) that will insure a number of AES businesses worldwide for property damage and business interruption. AES Global Insurance is domiciled in the state of Vermont, and the program commenced transacting business on April 4, 2003.

In any one year, AES Global Insurance is responsible for paying claims up to $20 million for any single event and $20 million in the aggregate (retained amount). This amount is in addition to the deductibles retained by the businesses within their insurance policies.

To cover losses above the retained amount, AES Global Insurance has purchased, from a panel of internationally recognized underwriters, insurance coverage up to a loss limit of $450 million, or higher if required by an individual asset. AES Global Insurance utilizes an internationally recognized underwriter to issue policies and process claims.

~~Sale~~Eletropaulo. On March 12, 2004, Eletropaulo finalized its re-profiling of ~~affiliate. On October 6, 2003, the Company announced an agreement to sell its ownership interest in Medway Power Limited (MPL) and AES Medway Operations Limited (AESMO) in an aggregate transaction valued at~~ approximately £47 million. AES will sell its 25% interest in MPL, a 688 MW natural gas-fired combined cycle facility located in the United Kingdom and its 100% interest in AESMO, the operating company for the facility. The combined value of both transactions equates to an equity purchase price which is substantially over the book value of the Company’s investment in both MPL and AESMO. Completion of the transaction is subject to certain third party approvals. The sale of MPL and AESMO closed in November 2003.

~~Debt retirement~~. On September 24, 2003, the Company called for redemption approximately $7 million aggregate principal amount of its outstanding 10% Senior Secured Notes due 2005. The notes were redeemed on a pro rata basis on October 25, 2003 at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the redemption date. On November 12, 2003, the Company called for redemption approximately $19 million aggregate principal amount of its outstanding 10% Senior Secured Notes due 2005. The notes will be redeemed on a pro rata basis on December 12, 2003 at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the redemption date. The redemptions were or will be made out of “excess asset sale proceeds” and reflected the portion of asset sale proceeds allocable to the notes.

~~Dominican Republic resolution suspension~~. On November 4, 2003, the Superintendent of Electricity of the Dominican Republic (the “Superintendent”) notified AES that it was suspending the effect of its prior Resolution No. SIE-60-2003 of September 5, 2003 (the “Resolution”). The Resolution had established a 120-day period for the presentation by AES of evidence that it had divested itself of its share interest in the Empresa Generadora de Electricidad Itabo, S.A., a subsidiary of AES Gener, S.A. If AES had failed to comply with the Resolution, the Superintendent threatened to impose administrative fines of up to 5% of the assets of AES.

The suspension of the Resolution by the Superintendent remains in effect until such time as the Superintendent has had the opportunity to review proposed amendments to the General Electricity Law of the Dominican Republic, including permitting vertical integration of generation and distribution in the electric sector, to be made by a special energy commission created by Presidential Decree No. 1036-03 of October 28, 2003. In the event that the Resolution is reinstated, AES would appeal the validity of the Resolution to the National Energy Commission.

~~Sale of project interest.~~ ~~In November 2003, a third party acquired a minority interest in the Cartagena Project for approximately €36 million.~~

The AES Corporation (including all its subsidiaries and affiliates, and collectively referred to herein as “AES” or the “Company” or “we”), founded in 1981, is a leading global power company. The Company’s goal is to help meet the world’s need for electric power in ways that benefit all of our stakeholders, to build long-term value for the Company’s shareholders, and to assure sustained performance and viability of the Company for its owners, employees and other individuals and organizations who depend on the Company. AES participates primarily in four lines of business: contract generation, competitive supply, large utilities and growth distribution.

Contract generation consists of multiple power generation facilities located around the world. Provided that the counterparty’s credit remains viable, these facilities have contractually limited their exposure to commodity price risks and electricity price volatility by entering into long-term (five years or longer) power purchase agreements for 75% or more of their capacity. Competitive supply consists of generating facilities that sell electricity directly to wholesale customers in competitive markets. Additionally, as compared to the contract generation segment discussed above, these generating facilities generally sell less than 75% of their output pursuant to long-term contracts with pre-determined pricing provisions and/or sell into power pools, under shorter-term contracts or into daily spot markets. Competitive supply results are generally more sensitive to fluctuations in the market price of electricity, natural gas and coal, in particular. The large utility business is comprised of three utilities located in three countries: the U.S. (IPALCO Enterprises, Inc. (“IPALCO”)), Brazil (Eletropaulo Metropolitana Electricidade de Sao Paulo S.A. (“Eletropaulo”)) and Venezuela (C.A. La Electricidad de Caracas (“EDC”)). Together, these facilities serve nearly 7 million customers in North America, the Caribbean and South America. Our growth distribution business includes distribution facilities serving approximately 5 million customers that are generally located in developing countries or regions where the demand for electricity is expected to grow at a higher rate than in more developed parts of the world.

The revenues from our facilities that distribute electricity to end-use customers are generally subject to regulation. These businesses are generally required to obtain third party approval or confirmation of rate increases before they can be passed on to the customers through tariffs. These businesses comprise the large utilities and growth distribution segments of the Company. Revenues from contract generation and competitive supply are not regulated.

~~The distribution of revenues between the segments for the three and nine months ended September 30, 2003 and 2002 is as follows:~~

Certain subsidiaries and affiliates of the Company (domestic and non-U.S.) have signed long-term contracts or made similar arrangements for the sale of electricity and are in various stages of developing the related greenfield power plants. Successful completion depends upon overcoming substantial risks, including, but not limited to, risks relating to failures of siting, financing, construction, permitting, governmental approvals or the potential for termination of the power sales contract as a result of a failure to meet certain milestones. At September 30, 2003, capitalized costs for projects under construction were approximately $2.0 billion. The Company believes that these costs are recoverable; however, no assurance can be given that individual projects will be completed and reach commercial operation or that the Company will continue to pursue certain of those projects.

On April 3, 2003, AES successfully completed a consent solicitation to amend the definition of “Material Subsidiary” and certain other provisions in its outstanding senior and senior subordinated notes to conform those provisions to the provisions of its 10% senior secured notes. On May 8, 2003, AES completed a $1.8 billion private placement of second priority senior secured notes. The second priority senior secured notes were issued in two tranches: $1.2 billion aggregate principal amount of 8 3/4% second priority senior secured notes due 2013 and $600 million aggregate principal amount of 9% second priority senior secured notes due 2015. The net proceeds were or will be used by AES to (i) repay $475 million of debt outstanding under its senior secured credit facilities, (ii) to repurchase approximately $1.1 billion aggregate principal amount of its senior notes pursuant to a tender offer, (iii) to repurchase approximately $104 million aggregate principal amount of its senior subordinated notes pursuant to a tender offer and (iv) for general corporate purposes, which included repurchasing other outstanding securities. AES also amended its senior secured credit facilities to permit the private placement and tender offer described above and to provide certain additional flexibility under the covenants contained therein.

In June 2003, AES China Generating Co. Ltd. (“Chigen”), a wholly-owned subsidiary of the Company, completed a $175 million bond refinancing. Chigen is a leading independent power generation company in the Peoples Republic of China and is one of the few international developers to successfully complete the development of electric power plants in the country.

~~In July 2003, AES announced that its wholly-owned subsidiary, AES Hawaii, Inc. (“AES Hawaii”), completed a non-recourse refinancing of its existing debt through the private placement of $500~~$800 million in senior secured notes, and obtained a $25 million letter of credit facility. AES Hawaii is a 180 MW coal-fired power plant located on the island of Oahu in Kapolei, Hawaii, which commenced commercial operations in September 1992. As a result of the refinancing, AES received net cash proceeds of approximately $24 million.

On July 29, 2003, the Company amended and restated its senior secured bank credit facilities. As amended and restated, the credit facilities provide for a $250 million revolving loan and letter of credit facility and a $700 million term loan facility.outstanding debt. As a result of this transaction, approximately 70% of the ~~Company~~re-profiled debt will be denominated in Brazilian Reais. The syndicated debt has ~~substantially reduced parent~~four tranches for both the U.S. Dollar and Brazilian Real debt portions with maturities through ~~2007, achieved~~2008. The interest rate on the U.S. Dollar re-profiled debt is Libor plus 2.5% to 4.75% at March 31, 2004, and the interest rate on the re-profiled Brazilian Real debt is Certificate of Interbank Deposits (“CDI”) plus 2.5% to 4.75% which reduces to Libor and CDI plus 2.25% to 4.5% upon satisfaction of a ~~significant decrease in parent interest expense,~~post closing down payment. CDI is an index based upon the average rate per cost of loans negotiated among the banks within Brazil. On March 31, 2004, Libor was 1.11% and ~~further enhanced its financial flexibility. Under the amended terms, the maturity~~CDI was 16.02%. A down payment of approximately 17% of the ~~bank credit facilities has been extended to July 31, 2007 (subject to a possible extension to April 30, 2008~~principal amount is expected in the ~~case~~first half of ~~the term loans if certain conditions are met). The total amount of credit available under the amended facilities was increased by $135 million. This increase, together with cash on hand, was used~~2004 and is to repay in full the outstanding balance of the AES New York Funding SELLS loan, resulting in the release of the unregistered common stock of AES and other collateral that secured such loan. The AES Corporation on January 6, 2003 and February 25, 2003 authorized AES Eastern Energy, L.P. to issue letters of credit to counterparties on its $250 million senior secured revolving credit facility up tobe provided from the amount of ~~$25~~the loan proceeds expected from certain loans to be provided by BNDES associated with rationing and Parcel A tracking account (CVA) tariff deferrals. After making the down payment, approximately $121 million, $214 million, $170 million and ~~$35~~$146 million ~~for the years~~ of ~~2003~~principal repayments will be due in 2005, 2006, 2007 and ~~2004,~~2008, respectively. AsNo principal payments are due in 2004. Approximately $69 million of ~~June 30, 2003, AES Eastern Energy, L.P. has obtained letters of credit of $9.7 million, which~~receivables have been provided as ~~additional margin~~collateral to ~~support normal, ongoing hedging activities~~the debt. Eletropaulo may pay dividends after March 31, 2005 to the extent it is required by Brazilian law, or certain dividend conditions (which include payment of scheduled amortization and the compliance with financial ratios) are met. The refinancing was accounted for as a ~~number~~modification of ~~counterparties.~~

~~Loans under~~debt instruments; therefore, the ~~amended facilities bear a floating~~bank fees of $19 million associated with this transaction were capitalized and will be amortized using the effective interest rate ~~at either LIBOR plus 4% or a base rate plus 3%. The term loans are subject to mandatory prepayment with a portion of net cash proceeds of certain asset sales in excess of $250 million and~~method over the ~~proceeds of certain debt issues. The amended and restated credit facility benefits from a first priority lien, subject to certain exceptions and permitted liens, on (i) all~~life of the capital stock of material domestic subsidiaries owned directly by AES and 65% of the capital stock of certain material foreign subsidiaries owned directly by AES and (ii) certain inter-company receivables and notes receivable and inter-company tax sharing agreements.loan. Third party costs were expensed. The ~~collateral is shared~~agreement with ~~the Company’s 10% Senior Secured Notes due 2005 and certain other secured parties.~~

On July 29, 2003, the Company announced that it had called for redemption all $198 million aggregate principal amount of its outstanding 10 1/4% Senior Subordinated Notes due 2006. The notes were redeemed on August 28, 2003 at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the redemption date.

On September 24, 2003, the Company called for redemption of approximately $7 million aggregate principal amount of its outstanding 10% Senior Secured Notes due 2005. The notes were redeemed on a pro rata basis on October 25, 2003 at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the redemption date. On November 12, 2003, the Company called for redemption approximately $19 million aggregate principal amount of its outstanding 10% Senior Secured Notes due 2005. The notes will be redeemed on a pro rata basis on December 12, 2003 at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the redemption date. The redemptions were or will be made out of “excess asset sale proceeds” and reflected the portion of asset sale proceeds allocable to the notes.

AES has announced a number of strategic initiatives designed to decrease its dependence on access to the capital markets, strengthen its balance sheet, reduce the financial leverage at the parent company and improve short-term liquidity. One of these initiatives involves the sale of all or part of certain of the Company’s subsidiaries. The Company continues to pursue required approvals for completion of sales previously announced and evaluate which additional businesses it may sell. However, there can be no assurance that all approvals will be obtained and no guarantee that the proceeds from such sales transactions will cover the entire investment in such subsidiaries. Additionally, depending on which businesses are eventually sold, the entire or partial sale of any subsidiaries may change the current financial characteristics of the Company’s portfolio and results of operations, and in the future may impact the amount of recurring earnings and cash flows the Company would expect to achieve.

obtaining governmental and lender consents, or the SPA will terminate. AES and CDC Globeleq on September 17, 2003 also agreed to increase the equity purchase price for the sale from $127 million to $137 million, subject to purchase price adjustments at the time of completion of the sale which we currently estimate to be an additional $10 to 15 million. While the Company believes that these consents can be obtained prior to the February 17, 2004 termination date, there can be no assurance that the consents will be obtained by that date or that the sale will ultimately be completed. These two businesses were previously reported in the contract generation segment.

Also during March 2003, the Company announced an agreement to sell an approximately 32% ownership interest in AES Oasis Limited (“AES Oasis”). AES Oasis is a newly created entity that was originally planned to own two electric generation projects and desalination plants in Oman and Qatar (AES Barka and AES Ras Laffan, respectively), the oil-fired generating facilities, AES LalPir and AES PakGen in Pakistan, as well as future power projects in the Middle East. During the second quarter of 2003, the parties agreed in principle to alter the structure of the transaction to exclude AES Ras Laffan, the Company’s electric generation project and desalination plant in Qatar, and to offer for sale approximately 39% of our ownership interest in the revised AES Oasis entity. Completion of the sale as contemplated under the agreement is subject to certain conditions, including government and lender approvals that must be met and obtained prior to November 30, 2003, on which date the Oasis Stock Purchase Agreement (“Oasis SPA”) would terminate. There can be no assurance that the sale will ultimately be completed. At the time of closing, AES will receive cash proceeds of approximately $150 million.

On October 6, 2003, the Company announced an agreement to sell its ownership interest in Medway Power Limited (MPL) and AES Medway Operations Limited (AESMO) in an aggregate transaction valued at approximately £47 million. AES will sell its 25% interest in MPL, a 688 MW natural gas-fired combined cycle facility located in the United Kingdom and its 100% interest in AESMO, the operating company for the facility. The combined value of both transactions equates to an equity purchase price which is substantially over the book value of the Company’s investment in both MPL and AESMO. Completion of the transaction is subject to certain third party approvals. The sale of MPL and AESMO closed in November 2003.

~~In September 2003, AES reached an agreement to sell 100% of its ownership interest in AES Whitefield, a generation business. The sale is structured as a stock purchase agreement.At September 30, 2003 this business was classified as held for sale in accordance with SFAS No. 144. AES Whitefield was previously reported in the contract generation segment.~~

In July 2003, AES reached an agreement to sell 100% of its ownership interest in AES Mtkvari, AES Khrami and AES Telasi for gross proceeds of $23 million. At June 30, 2003 these businesses were classified as held for sale and the Company recorded a pre-tax impairment charge of $204 million during the second quarter of 2003 to reduce the carrying value of the assets to their estimated fair value in accordance with SFAS No. 144. This transaction closed in August 2003 and resulted in a total write off of approximately $210 million. AES Mtkvari and AES Khrami were previously reported in the contract generation segment and AES Telasi was previously reported in the growth distribution segment.

~~During the first quarter of 2003, AES committed to a plan to sell its ownership in AES Barry Limited (“AES Barry”), and had classified it in discontinued operations.~~ ~~On July 24, 2003, the Company reached an agreement to sell substantially~~Eletropaulo creditors resolves all the ~~physical assets of AES Barry~~defaults except those relating to ~~an unrelated third party for £40 million (or~~ approximately $62 million). The sale proceeds were used to discharge part of AES Barry’s debt and to pay certain transaction costs and fees. The Company will continue to own the stock of AES Barry while AES Barry pursues a £60 million claim against TXU EET, which is currently in bankruptcy administration. AES Barry will receive 20% of amounts recovered from the administrator. If the proceeds from TXU EET are not sufficient to repay the bank debt, the banks have recourse to the shares of AES Barry, but have no recourse to the Company for a default by AES Barry.

~~In early 2002, the Company initiated a corporate-wide effort to more closely focus on performance improvement opportunities, and~~

also to better capture the benefits of scale in the procurement of services and supplies. The Company expects to realize benefits in both earnings and cash flows; however, there can be no assurance that the program will be successful in achieving these savings. The inability of the Company to achieve cost reductions and revenue enhancements may result in less than expected earnings and cash flows in 2003 and beyond. In addition, the shift to a more centralized organizational structure has led, and will continue to lead, to an expansion in the number of people performing certain financial and control functions, and will likely result in an increase in the Company’s selling, general and administrative expenses.

In July, 2002 the Company established a Restructuring Office, formerly referred to as the Turnaround Office, to focus on improving the operating and financial performance of, selling or abandoning certain of its underperforming businesses. Businesses are considered to be underperforming if they do not meet the Company’s internal rate of return criteria, among other factors. The Restructuring Office is actively managing Gener, Sonel, Wolf Hollow, Granite Ridge, the Company’s businesses within the Dominican Republic, Brazil and Argentina, as well as evaluating certain development projects. The Company is evaluating whether the profitability and cash flows of such businesses can be sufficiently improved to achieve acceptable returns on the Company’s investment, or whether such businesses should be disposed of or sold. In making this evaluation the Company also considers current and proposed tariff arrangements, the capital expenditure requirements within each business, the terms and conditions of each subsidiary’s contractual obligation and its ability to access the capital markets. In addition, other factors may influence the Company’s evaluation of a business, such as changes and volatility in inflation rates, electricity prices, fuel and other commodity prices in the U.S. and non-U.S. markets. If the Company determines that certain businesses are to be sold or otherwise disposed of, there can be no guarantee that the proceeds from such transactions would cover the Company’s entire investment in such subsidiaries or that such proceeds will be available to the Company. It is possible that the restructuring efforts will change the ownership structure or the manner in which a business operates, and these efforts may result in an impairment charge if the Company is not able to recover its investment in such business. The inability of the Company to successfully restructure the underperforming businesses may result in less earnings and cash flows in 2003 and beyond. The responsibilities of the Restructuring Office may become less significant in the future as the Company resolves many of the issues currently being addressed.

In 2002, Argentina continued to experience a political, social and economic crisis that resulted in significant changes in general economic policies and regulations as well as specific changes in the energy sector. As a result, the Argentine peso experienced a significant devaluation relative to the U.S. dollar during 2002. In the first nine months of 2003, the political and social situation in Argentina showed signs of stabilization, and the economy and electricity demand started to recover. Presidential elections and the establishment of a new government regime occurred in May 2003, and the new government may enact changes to the regulations governing the electricity industry.

~~The Company recorded approximately $15~~$2.2 million of pre-tax foreign currency transaction losses during the third quarter of 2003 on the U.S. dollar-denominated net liabilities of its Argentine subsidiaries representing a weakening of the Argentine peso relative to the U.S. dollar from 2.75 at June 30, 2003 to 2.87 at September 30, 2003. During the nine months ended September 30, 2003, the Company recorded pre-tax foreign currency transaction gains at its Argentine subsidiaries of approximately $47 million representing a strengthening of the Argentine peso relative to the U.S. dollar from 3.32 at December 31, 2002 to 2.87 at September 30, 2003. In January 2003, one of the Company’s generation businesses in Argentina changed its functional currency to the U.S. dollar as a result of changes in its revenue profile from Argentine pesos to U.S. Dollars.

AES has several subsidiaries in Argentina operating in both the competitive supply and growth distribution segments of the electricity business. Eden/Edes and Edelap are distribution companies that operate in the province of Buenos Aires. Generating businesses include Alicura, Parana, CTSN, Rio Juramento and several other smaller hydro facilities. These businesses are experiencing reduced cash flows arising from the economic and regulatory changes described earlier, and Eden/Edes, Edelap, TermoAndes and Parana are in default on their project financing arrangements. AES is generally not required to support the potential cash flow or debt service obligations of these businesses.

The effects of the current circumstances on future earnings are uncertain and difficult to predict. At September 30, 2003, AES’s total investment in the competitive supply business in Argentina was approximately $122 million and the total investment in the growth distribution business was approximately negative $27 million.

During the first quarter of 2002, the Company recorded an after-tax impairment charge of $190 million which represented the write off of goodwill related to certain of the Company’s businesses in Argentina. This charge resulted from the adoption of SFAS No. 142 and is recorded as a cumulative effect of a change in accounting principle on the consolidated statement of operations.

~~Depending on the ultimate resolution of these uncertainties, AES may be required to record a material impairment loss or write off associated with the recorded carrying values of its investments.~~

~~Eletropaulo.~~ AES has owned an interest in Eletropaulo since April 1998. The Company began consolidating Eletropaulo in February 2002 when AES acquired a controlling interest in the business. AES financed a significant portion of the acquisition of Eletropaulo, including both common and preferred shares, through loans and deferred purchase price financing arrangements provided by BNDES, the National Development Bank of Brazil, and its wholly owned subsidiary BNDES Participacoes Ltda. (“BNDESPAR”), to AES Elpa and AES Transgas, respectively. All of the common shares of Eletropaulo owned by AES Elpa are pledged to BNDES to secure the AES Elpa debt and all of the preferred shares of Eletropaulo owned by AES Transgas and AES Cemig Empreendimentos II, Ltd. (which owns approximately 7.4% of Eletropaulo’s preferred shares, representing 4.4% economic ownership of Eletropaulo) are pledged to BNDESPAR to secure AES Transgas debt. AES has pledged its share of the proceeds in the event of the sale of certain of its businesses in Brazil, including Sul, Uruguaiana, Eletronet and AES Communications Rio, to secure the indebtedness of AES Elpa to BNDES for the repayment of the debt of AES Elpa. The interests underlying the Company’s investments in Uruguaiana, AES Communications Rio and Eletronet have also been pledged as collateral to BNDES under the AES Elpa loan.

~~As of September 30, 2003, the Eletropaulo operating company had approximately $1.4 billion of~~ outstanding ~~indebtedness, and AES Elpa and AES Transgas had approximately $705 million and $635 million of outstanding BNDES and BNDESPAR indebtedness, respectively, including accrued interest.~~ Due, in part, to the effects of power rationing, the decline of the value of the Brazilian real in U.S. dollar terms in 2001 and 2002 and the lack of access to the international capital markets, Eletropaulo, AES Elpa and AES Transgas continue to face significant near-term debt payment obligations that must be extended, restructured, refinanced or repaid. As a result of AES Elpa’s and AES Transgas’s failures to pay amounts due under the financing arrangements, BNDES has the right to call due all of AES Elpa’s outstanding debt with BNDES, and BNDESPAR has the right to call due all of AES Transgas’s outstanding debt with BNDESPAR. In addition, as a result of a cross default provision, at September 30, 2003, BNDES has the right to call due approximately $247 million it loaned to Eletropaulo under the program in Brazil established to alleviate the effects of rationing on electricity companies. Due to BNDES’s right of acceleration and existing payment, financial covenant and other defaults under Eletropaulo loan agreements, Eletropaulo’s commercial lenders have the right to call due approximately $827~~million of indebtedness as of September 30, 2003. Due to a cross-payment default provision, Eletropaulo received a waiver until December 15, 2003, with respect to $69 million of debentures.At September 30, 2003, Eletropaulo, AES Elpa and AES Transgas have a combined $2.3 billion of~~ debt, classified as current at March 31, 2004, with its commercial paper lenders. These outstanding defaulted debts do not have any cross-default or similar effects on any other debt. The Company is studying the ~~accompanying consolidated balance sheet.~~alternatives to solve this pending default.

~~On September 8, 2003, AES entered into a memorandum of understanding with BNDES~~Sul. The efforts to restructure the outstanding loans owed to BNDES by several of AES' Brazilian subsidiaries. The restructuring will include the creation of a new company that will hold AES' interests in Eletropaulo, Uruguaiana and Tiete. Sul will be contributed upon the successful completion of its financial restructuring. AES will own 50.1%, and BNDES will own 49.9%, of the new company. Under the terms of the agreement, 50% of the currently outstanding BNDES debt of $1.2 billion will be converted into 49.9% of the new company. The remaining outstanding balance of $515 million (which remains non-recourse to AES) will be payable over a period of 10 to 12 years. AES and its subsidiaries will also contribute $85 million as part of the restructuring, of which $60 million will be contributed at ~~closing and $25 million will be contributed one year after closing.~~

~~Closing of the transaction is subject to the negotiation and execution of definitive documentation, certain lender and regulatory approvals and valuation diligence to be conducted by BNDES.~~

Eletropaulo, AES Elpa and AES Transgas are in negotiations with debt holders, BNDES and BNDESPAR, to seek resolution of these issues, during the course of which additional payment and other defaults may occur. There can be no assurance that these negotiations will be successful. If the negotiations are not concluded satisfactorily, Eletropaulo would face an increased risk of intervention by

ANEEL, loss of its concession and of bankruptcy, resulting in an increased risk of loss of AES’s investment in Eletropaulo. Dividend restrictions applicable to Eletropaulo are expected to reduce substantially the ability of Eletropaulo to pay dividends. In addition, the refinancing agreement entered into with BNDES in June 2002 provides for Eletropaulo to pay directly to BNDES any dividends in respect of the shares held by AES Elpa, AES Transgas and Cemig Empreendimentos II Ltd. On April 30, 2003, BNDESPAR took preliminary steps to foreclose on the preferred shares of Eletropaulo held by AES Transgas and AES CEMIG Empreendimentos II. If such foreclosure were to occur, it would result in a loss and a corresponding write-off of a portion or all of the Company’s investment in Eletropaulo.

On May 20, 2003, Eletropaulo received a letter from the president of the Mines and Energy Commission of the House of Representatives of the National Congress. The letter requested that Eletropaulo attend a Public Hearing (the “Public Hearing”) at the National Congress to provide information concerning facts in connection with Eletropaulo’s privatization. No other specificity regarding the information sought by the Commission was provided in the May 20 letter. On May 28, 2003, the Public Hearing was postponed until June 12, 2003. On June 12, 2003, a representative of Eletropaulo attended the Public Hearing as requested by the Commission and discussed various issues regarding the electricity market and privatization. On September 17, 2003, the President of Eletropaulo attended another Public Hearing as requested by the Commission and reinforced the importance of Eletropaulo in the electricity sector in Brazil

During the fourth quarter of 2002, the Company recorded a pre-tax impairment charge of approximately $756 million at Eletropaulo. This charge was taken to reflect the reduced carrying value of certain assets, including goodwill, primarily resulting from slower than anticipated recovery to pre-rationing electricity consumption levels and lower electricity prices due to devaluation of foreign exchange rates. The Company’s total investment associated with Eletropaulo as of September 30, 2003 was approximately negative $1.0 billion. AES may have to write-off additional assets of Eletropaulo, AES Elpa or AES Transgas if no satisfactory resolution is reached.

~~Sul.~~ Sul and AES Cayman Guaiba, a subsidiary of the Company that owns the Company’s interest in Sul, are ~~facing near-term debt payment obligations that must be extended, restructured, refinanced or repaid. Sul had outstanding debentures of approximately $77 million (including accrued interest), at~~in process and have been focused in the ~~September 30, 2003 exchange rate~~following areas:

During the second quarter of 2002, ANEEL promulgated an order (“Order 288”) whose practical effect was to purport to invalidate gains recorded by Sul from inter-submarket trading of energy purchased from the Itaipu power station. The Company, in total, recorded a pre-tax provision as a reduction of revenues of approximately $160 million during the second quarter of 2002. Sul filed a motion for an administrative appeal with ANEEL challenging the legality of Order 288 and requested a preliminary injunction in the

Brazilian federal courts to suspend the effect of Order 288 pending the determination of the administrative appeal. Both were denied. In August 2002, Sul appealed and in October 2002 the court confirmed the preliminary injunction’s validity. Its effect, however, was subsequently suspended pending an appeal by ANEEL and an appeal by Sul.

~~In December 2002, prior to any settlement of the Brazilian Wholesale Electricity Market (“MAE”), Sul filed an incidental claim~~

requesting, by way of a preliminary injunction, the suspension of the Company’s debts registered in the MAE. A Brazilian federal judge granted the injunction and ordered that an amount equal to one-half of the amount claimed by Sul from inter-market trading of energy purchased from Itaipu in 2001 be set aside by the MAE in an escrow account. The injunction was subsequently overturned. Sul has appealed that decision and requested the judge to reinstate the injunction. This request has been denied and Sul will appeal such decision, asking the Regional Federal Court to reinstate the injunction until the merits of the appeal against the sentence are examined.

The MAE has settled its registered transactions for the period from late December 2002 through early 2003. Without considering the effect of Order 288, Sul owes approximately $27 million, based upon the September 30, 2003 exchange rate. Sul does not have sufficient funds to make this payment, and several creditors have filed lawsuits in an effort to collect amounts they claim are due. Sul is petitioning the courts to aggregate the individual lawsuits with the Order 288 actions filed by Sul in order to postpone payment until the matter is resolved. If Sul prevails and the MAE settlement occurs absent the effect of Order 288, Sul will receive approximately $119 million, based upon the September 30, 2003 exchange rate. If Sul is unsuccessful and if Sul is unable to pay any amount that may be due to MAE, penalties and fines could be imposed up to and including the termination of the concession contract by ANEEL. Sul is current on all MAE charges and costs incurred subsequent to the period in question in the Order 288 matter.

~~Sul continues legal action against ANEEL to seek resolution of these issues.~~ Sul and AES Cayman Guaiba will continue to face shorter-term debt maturities in ~~2003~~2004 and ~~2004~~2005 but, given that a bankruptcy proceeding would generally be an unattractive remedy for each of its lenders as it could result in an intervention by ANEEL or a termination of Sul’s concession, we think such an outcome is unlikely. ~~We cannot assure you, however,~~However, we can not be assured that future negotiations will be successful and AES may have to ~~write off~~write-off some or all of the assets of Sul or AES Cayman Guaiba. The Company’s total investment associated with Sul as of ~~September 30, 2003~~March 31, 2004 was approximately ~~$266~~$271 million.

During the first quarter of 2002, the Company recorded an after-tax impairment charge of $231 million related to the write off of goodwill at Sul. This charge resulted from the adoption of SFAS No. 142 and is recorded as a cumulative effect of a change in accounting principle on the consolidated statements of operations.

~~CEMIG.~~ An equity method affiliate of AES received a loan from BNDES to finance its investment in CEMIG, and the balance, including accrued interest, outstanding on this loan is approximately $758 million as of September 30, 2003. Approximately $57 million of principal and interest, which represents AES’s share, was scheduled to be repaid in May 2003. The equity method affiliate of the Company was not able to repay the amount due and has not yet reached an agreement to refinance or extend the maturities of the amounts due. BNDES may choose to seize the shares held as collateral. Additionally, the existing default on the debt used to finance the acquisition of CEMIG may result in a cross default to the BNDES debt used to finance the acquisition of Eletropaulo and the BNDES rationing loan.

In the fourth quarter of 2002, a combination of events occurred related to the CEMIG investment. These events included consistent poor operating performance in part caused by continued depressed demand and poor asset management, the inability to adequately service or refinance operating company debt and acquisition debt, and a continued decline in the market price of CEMIG shares. Additionally, our partner in one of the holding companies in the CEMIG ownership structure sold its interest in this company to an unrelated third party in December 2002 for a nominal amount. Upon evaluating these events in conjunction with each other, the Company concluded that an other than temporary decline in value of the CEMIG investment had occurred. Therefore, in December 2002, AES recorded a charge related to the other than temporary impairment of the investment in CEMIG, and the shares in CEMIG were written-down to fair market value. Additionally, AES recorded a valuation allowance against a deferred tax asset related to the CEMIG investment. At September 30, 2003, the Company’s total investment associated with CEMIG was negative.

~~Tiete.~~ The MAE settlement for the period from September 2000 to December 2002 for Tiete totals an obligation of approximately $79 million, at the September 30, 2003 exchange rate. Fifty percent of the amount was due on December 26, 2002, and the remainder was due on July 3, 2003 after MAE’s numbers were audited. According to the industry-wide agreement reached in December 2001, BNDES was supposed to provide Tiete with a credit facility in the amount of approximately $41 million, at the September 30, 2003 exchange rate, to pay off a part of the liability. This credit facility has not yet been provided, but in the meantime, a Brazilian federal court has granted Tiete a temporary injunction suspending the payment of the obligation until BNDES makes this credit facility available. As a result, Tiete paid MAE the difference from the total liability and the credit facility in the amount of approximately $38 million on July 3, 2003. Should the Brazilian federal court lift the temporary injunction, as is possible at any time, Tiete would be obligated to pay the remaining MAE liability immediately. Tiete has started to receive from the distribution companies the extraordinary tariff revenue in order to recover $49 million from the total loss in respect of the MAE of $74 million, and the total recovery is expected to be completed over a six-year period. As of September 30, 2003, Tiete had collected approximately $2 million of extraordinary tariff revenue from the distribution companies and submitted this amount to MAE. In the absence of the BNDES credit facility, Tiete has started negotiations with its creditors under the MAE settlement in order to seek agreement to coordinate payment of Tiete's MAE settlement liabilities with its receipt of the extraordinary tariff revenue over the six-year period.

~~Under Brazilian corporate law, Tiete may only~~13. FINANCING TRANSACTIONS

Debt redemptions. In the quarter ended March 31, 2004, AES redeemed parent debt (net of refinancings) of approximately $350 million. These redemptions were comprised of $300 million of cash redemptions (both mandatory and optional), as well as $50 million of exchanges of debt securities into common stock of the parent.

Public issuance of debt securities. On February 10, 2004, AES priced an offering of $500 million of unsecured senior notes. The notes mature on March 1, 2014 and are callable at the Company’s option at any time at a redemption price equal to 100% of the principal amount of the notes plus a “make-whole” premium. The notes were issued at a price of 98.288% and pay interest semi-annually at an annual coupon rate of 7.75%. AES used the net proceeds of the offering to ~~shareholders dividends or interest~~repay $500 million of the $700 million term loan under its senior secured credit facilities.

Amended and restated bank facilities. On March 17, 2004, AES increased the size of its revolving loan and letter of credit facility to $450 million from the previous $250 million. As of March 31, 2004, none of the revolving loan is outstanding, $79 million of which is committed to the letter of credit facility.

The senior secured credit facilities are subject to mandatory prepayment on a ratable basis with the Company’s 10% senior secured exchange notes due 2005 with the net ~~worth~~cash proceeds from asset sales, which must be applied pro rata to repay the bank facilities and the 10% senior secured exchange notes using 60% of net ~~income~~cash proceeds from asset sales, provided that the 60% shall be reduced to 50% when and if the Parent’s Recourse Debt to Cash Flow ratio is less ~~allocations to statutory reserves. In 2003, Tiete has not~~than 5:1, and ~~is not expected to~~provided further that the bank facilities shall be able to pay dividends and interest on net worth to shareholders to enable payment to be made of amounts due in respect of the approximately $295 million debt obligations of AES IHB Cayman, Ltd. (“IHB”), an affiliate of Tiete, guaranteed by Tiete’s parent company, AES Tiete Holdings, Ltd. (“Tiete Holdings”), and Tiete’s direct shareholders, AES Tiete Empreendimentos Ltda (“TE”) and Tiete Participacoes Ltda. IHB’s debt obligationswaive their pro rata redemption at each individual lenders’ option.

The senior secured credit facilities are also ~~supported by a foreign exchange guaranty facility and related political risk insurance provided~~subject to mandatory prepayment with the net cash proceeds from the issuance of debt by the Overseas Private Investment Corporation (“OPIC”), an agency of the United States government. The payment due June 15, 2003 was made from the debt service reserve account and Tiete submitted an application to OPIC for a $5 million disbursement under the foreign exchange guaranty facility. Another payment of principal and interest plus insurance premiums on the debt obligations in the amount of approximately $22 million is due on December 15, 2003. Tiete Holdings does not expect that IHB will be able to make that payment. As a result, Tiete Holdings is seeking certain amendments and waivers to the debt obligations and the OPIC documentation designed to extend that payment, restructure the obligations and otherwise reduce the risk of defaults due to the limitation on dividend and interest on net worth payments, including amendments to allow debt payments to be made withsubsidiaries, the proceeds of ~~loans~~which are upstreamed to the Parent, and of which 75% must be applied (after the first $200 million proceeds accumulating from ~~Tiete. Any further loan~~March 17, 2004 onwards) to repay the bank facilities, other than such issuances by ~~Tiete to its affiliates~~IPALCO or the Guarantors in which case such sweep percentage is ~~subject to ANEEL approval. No assurance can be given, however, that these amendments will be adopted or that ANEEL will grant such approval.~~

Energia Paulista Participações S/A (“EPP”), an indirect subsidiary of AES, has outstanding local non recourse debentures in the amount of $60 million which was due on August 11, 2003. These debentures were issued to acquire 19% of Tiete’s preferred shares and are guaranteed by such shares. On August 7, 2003, approval of approximately 91% of the debenture holders was obtained to change certain terms and conditions. The debentures will be due August 11, 2005, interest on the debentures will be increased from 12% to 14% per annum but no interest payment will be made until August 11, 2004 and if no interest payment is made at that time the debenture holder will be entitled to convert the debentures held into the preferred shares used to secure the guarantee. The remaining 9% of debenture holders that did not accept the offer received shares held for collateral in lieu of payment reducing the Company's interest in the preferred shares from 19% to 17%100%.

The 10% senior secured exchange notes are subject to mandatory redemption with their ratable portion (relative to the senior secured credit facilities) of up to 75% of the Company’s adjusted free cash flow calculated at the end of the fiscal years 2003 and 2004.

Certain of the Company’s obligations under the senior secured credit facilities are guaranteed, equally and ratably with its 10% senior secured notes due 2005, by its direct subsidiaries through which the Company owns its interests in the Shady Point, Hawaii, Warrior Run and Eastern Energy businesses. The Company’s obligations under the senior secured credit facilities are, subject to certain exceptions, substantially secured, equally and ratably with its 10% senior secured notes due 2005, by: (i) all of the capital stock of domestic subsidiaries owned directly by the Company and 65% of the capital stock of certain foreign subsidiaries owned directly or indirectly by the Company and (ii) certain intercompany receivables, certain intercompany notes and certain intercompany tax sharing agreements.

IPALCO. On January 13, 2004, IPL issued $100 million of 6.60% first mortgage bonds due January 1, 2034. The net proceeds of approximately $99 million were used to retire $80 million of 6.05% first mortgage bonds due February 2004 and to reimburse IPL’s treasury for expenditures previously incurred in connection with its capital expenditure program.

Project level defaults. Certain of our subsidiaries are currently in default with respect to all or a portion of their outstanding indebtedness. The total ~~investment associated with Tiete~~debt classified as current in the accompanying consolidated balance sheets related to such defaults was $1.4 billion at March 31, 2004, of ~~September 30, 2003 was~~which approximately ~~$44 million.~~$571 million is held at discontinued operations and businesses held for sale.

~~Uruguaiana.~~Gener ~~The MAE~~. Pursuant to Gener’s plan to refinance $700 million of its indebtedness, (i) on February 27, 2004, AES invested through its subsidiary, Inversiones Cachagua Ltd. (“Cachagua”), a holding company of Gener, approximately $298 million in Gener as settlement ~~for~~of Cachagua intercompany loan with Gener; (ii) Gener issued $400 million of bonds that mature in 2014 and carry a coupon rate of 7.5%. In connection with the ~~period from September 2000 to September 2002 for Uruguaiana totals an obligation of approximately $13 million at the September 30, 2003, exchange rate. Fifty percent~~issuance of the outstanding liability was due on December 26, 2002. Uruguaiana disagreed with the liability for the period from December 2000 to March 2002, which represents approximately $12 million at the September 30, 2003, exchange rate, and on December 18, 2002, Uruguaiana obtained an injunction from the Federal Court suspending the payment of the liability under dispute. On February 25, 2003, ANEEL and MAE filed an appeal against the injunction. On March 12, 2003, the judge responsible for the case did not accept the appeal and maintained the injunction for Uruguaiana. Uruguaiana believes that under the terms of its ANEEL Independent Power Producer Operational Permit, power purchase and regulatory contracts, it is not liable for replacement power costs arising directly out of the electric system’s instability. Furthermore, the civil action also discusses the power prices changed by ANEEL in August 2002 related to energy sold at the spot market in June 2001. Uruguaiana does not expect to have sufficient resources to pay the MAE settlement, and if the legal challenge of this obligation is not successful, penalties and fines could be imposed, up to and including the termination of the ANEEL Independent Power Producer Operational Permit. The Company’s total investment associated with Uruguaiana as of September 30, 2003 was approximately $269 million.

~~May 29, 2003 Eletronet Bankruptcy Court Order~~. In the Rio de Janeiro bankruptcy court proceedings for Eletronet, a company owned 51% by AES Bandeirantes Empreendimentos Ltda. (an entity formerly owned by the Company) (“AES Bandeirantes”) and 49% by Lightpar (a subsidiary of state-owned Eletrobras), the judge, without a hearing, granted the request of the bankruptcy trustee for a preliminary injunction to attach the common and preferred shares of Eletropaulo held by AES Elpa and AES Transgas, respectively, and the common shares of Tiete held by AES Tiete Empreendimentos Ltda. (“TE”). AES Elpa, AES Transgas and TE are indirect subsidiaries of the Company, but are wholly separate corporate entities from each other as well as AES Bandeirantes. The stated purpose of the bankruptcy court’s order was to assure the effectiveness of any future decision finding AES Bandeirantes responsible for Eletronet’s obligations. The Company believes there is no legal basis for the preliminary injunction. In July 2003, AES Transgas, AES Elpa, and Tiete filed an appeal to the state appeals court in Rio de Janeiro seeking the revocation of the preliminary injunction attaching the shares. The appeal is pending.

~~Other Regulatory Matters.~~ ~~The electricity industry in Brazil reached a critical point in 2001, as a result of~~bonds, a series of ~~regulatory, meteorological and market driven problems. The Brazilian government implemented a program for~~treasury lock agreements were executed to reduce Gener’s exposure to the rationing of electricity consumption effective as of June 2001. In December 2001, an industry-wide agreement was reached with the Brazilian government that applies to Eletropaulo, Tiete and CEMIG. The termsunderlying interest rate of the ~~agreement~~bonds. The treasury lock agreements were ~~implemented during 2002. In addition,~~not documented as cash flow hedges at the ~~electricity regulator, ANEEL, retroactively changed certain previously communicated methodologies during May 2002,~~time they were executed. The fair market value of these transactions represented a loss of $22.1 million before minority interest and ~~this resulted in a change~~income taxes and was recognized in the ~~calculation methods~~first quarter of 2004; (iii) Gener executed cash tender offers for ~~electricity pricing in the MAE. The Company recorded a pretax provision of approximately $160~~its $477 million ~~against revenues during May 2002 to reflect the negative impacts of this retroactive regulatory decision. The Company does not believe that the terms of the~~6% Chilean Convertible Notes and 6% U.S. Convertible Notes due 2005 (excluding non-conversion premium paid at maturity), and for its

~~industry-wide rationing agreement as currently being implemented restored the economic equilibrium~~$200 million 6.5% Yankee Notes due 2006. During March and April 2004, Gener repurchased approximately $145 million of ~~all~~6.5% Yankee Bonds and $56 and $157 million of the ~~concession contracts.~~6% U.S. and 6% Chilean Convertible Notes, respectively; and (iv) the equity capital markets transaction pursuant to which Cachagua planned to sell a portion of its Gener shares was terminated in early April due to uncertainty related to gas restrictions in Argentina. Cachagua had intended to use a portion of the proceeds from the equity sale to purchase its pro rata share, up to $97.8 million, of the new common Gener shares to be offered to existing shareholders in May 2004 as part of the restructuring plan. Notwithstanding its termination of the secondary Gener share sale, Cachagua is obligated to subscribe to its pro rata portion of the new Gener equity issuance. Cachagua placed $97.8 million, which represents its share of the dividend distributed by Gener on February 27, 2004, to all holders of Gener’s common stock plus the proceeds Cachagua received from a foreign exchange hedge, into a trust to ensure that it will have sufficient funds to purchase its pro rata share of the new common shares to be issued by Gener. Cachagua’s obligation to (i) contribute capital or (ii) subscribe to its pro rata portion of an offering of Gener common shares, may be funded with either a new financing, an additional capital contribution by AES or by using the dividend that is held in the trust account.

In ~~2003, Brazil entered a major round~~addition, on April 16, 2004, Gener completed the restructuring of ~~tariff revisions. On April 19, 2003, Sul~~$143 million debt of its subsidiaries TermoAndes S.A. (“TermoAndes”) and InterAndes S.A. (“InterAndes”). Under the terms of the agreement, lenders and swap counterparties received an upfront payment that was ~~granted a rate increase by ANEEL, the regulatory body in Brazil responsible for tariff revisions,~~funded with $36 million of ~~16.14%. On July 4, 2003, ANEEL granted a tariff revision for Eletropaulo of 10.95% plus 0.4% to be included~~cash held in the ~~tariff adjustment for~~TermoAndes and InterAndes trust accounts and a cash contribution of $26 million by Gener. In exchange, the ~~ensuing 12-month period.~~lenders and swap counterparties extended a new loan to Gener to enable it to repurchase the original notes and repay the swap termination fee. The ~~tariff revisions are meant~~new loan maturity was extended to ~~re-establish~~2010. As a ~~tariff level that would cover (i) costs for energy purchased~~result of the debt restructuring, the TermoAndes debt is no longer in default and other non-manageable costs, (ii) operations/maintenance costs of a “Reference Company,” and (iii) capital remuneration on the Company’s asset base using a “replacement cost” methodology. Each of these items is evaluated based on a “Test-Year,” as defined by ANEEL, which encompasses the following 12-months after the tariff increase. There remain a number of critical issues that were either not adequately consideredhas been re-profiled in the ~~process or remain unresolved.~~

~~The operations~~accompanying consolidated balance sheets as $74 million current non-recourse and maintenance costs considered in the tariff are based on the concept of a Reference Company, not the actual costs of the Company. In many cases, the Reference Company may not be reflective of distribution companies operating in Brazil and thus underestimate true operating costs. For example, for all distribution companies in Brazil, a bad debt level of 0.5% of net revenues was used. Eletropaulo and Sul believe that this is neither an appropriate level of bad debts in Brazil nor in many developed countries. In response to a request by ANEEL, the companies, together with others in the industry, recently hired third party consultants to carry out a detailed study of this issue. In addition, with respect to Eletropaulo, the Reference Company fails to address certain costs associated with its defined benefit pension plan. Eletropaulo inherited these costs in April 1998, at the time of privatization and such costs amount to an annual disbursement of approximately $64$69 million at the September 30, 2003 exchange rate. In addition, certain taxes were not considered as costs applicable to the Reference Company. On July 18, 2003, ANEEL released the technical note on the tariff revision for Eletropaulo and Sul. The information provided in the technical note is not sufficient in defining the Reference Company costs. Eletropaulo and Sul intend to either file for an administrative appeal against the tariff revision process within 10 days after ANEEL publicly releases the information related to the tariff revision processes to the public or file for judicial injunction prior to release.

Further, there is an additional uncertainty surrounding the regulation of electricity in Brazil and the application of an “X” factor, which is part of the tariff revision process. Every year after the tariff revision, the tariffs applicable to distribution companies are to be adjusted based on a formula that contains an “X” factor. The “X” factor is intended to permit the regulator to adjust tariffs so that consumers may share in the distribution company’s realization of increased operating efficiencies. The revision, however, is entirely within the regulators discretion and there have been changes to the concept from what was originally defined in the concession contract. The “X” factor is still pending further discussion with the regulator and will be subject to a public hearing process. The initial “X” factor adjustment is scheduled to be determined over the course of 2003, and this adjustment may have an impact, either positive or negative, on the amount and timing of the cash flows and earnings reported by our businesses in Brazil.

The distribution companies are challenging certain methodologies used for the tariff revision. For example, the rate base calculation used for the tariff reset is defined by ANEEL Resolution 493 which takes into account the replacement value of the concessionaire’s assets. Private investors are claiming that the minimum bid price established at the privatization process be used as the asset base determining remuneration. This claim is being pursued in the Brazilian courts but there is no assurance that it will be successful. In addition, under the replacement cost method used by ANEEL, the asset base calculation has not been finalized with many of the distribution companies, including Eletropaulo and Sul. ANEEL has used a provisional asset base number, based on a percentage of the fixed assets adjusted for inflation. In the case of Eletropaulo, the regulator has used 90% of the value of the adjusted fixed assets indexed by IGPM until June 2003. ANEEL has stated that once the final number pursuant to Resolution 493 is achieved, tariffs will be retroactively calculated and adjusted in the 2004 tariff adjustment, for the difference. There is no assurance at this point on what the final rate base amounts will be for Eletropaulo or Sul. ANEEL has released a technical note with changes to the original Resolution 493. On August 11, 2003, Eletropaulo and Sul filed an administrative appeal against the technical note, contesting the changes in the resolution as well as inconsistencies noted in the original version of Resolution 493. Finally, the companies believe that there is a timing mismatch in the parameters used in the respective formula. As the “Test-Year” assumes parameters for the following 12-months after the reset, it does not pick-up the effects of the inflation on the unit costs adopted for the Reference Company or on the value of the assets that comprise the regulatory Rate Base. There are discussions that are still ongoing at ANEEL in respect to such methodology.non-current non-recourse debt.

~~Tracking account.~~Dominican Republic. At the end of 2003, Los Mina and Andres, both wholly owned subsidiaries of AES in the Dominican Republic, each had covenant defaults on its outstanding debt. In addition, on March 11, 2004, Los Mina failed to make a $20 million revolving loan payment under its existing credit agreement. On April 30, 2004, an amendment to the existing Los Mina credit agreement was completed that extended the maturity of the loan and increased the interest rate. The Los Mina credit agreement amendment cured the Los Mina payment default and cross default under the Andres credit agreement. As of March 31, 2004, the debt for both Los Mina and Andres was reported as current non-recourse debt in the accompanying consolidated balance sheets because of the covenant defaults. Discussion with the lenders are ongoing. These businesses expect to receive waivers for the covenant defaults upon completion of those discussions.

Venezuela. ~~Power purchase costs, system charges,~~At March 31, 2004, our subsidiary EDC was not in compliance with the net worth covenant in two facilities of $94 million and ~~most non-manageable costs~~$7 million, respectively. The respective covenants require EDC to maintain Consolidated Tangible Net Worth of $1.5 billion based on Venezuelan GAAP. Due to the impact of the devaluation of Venezuelan Bolivar in the first quarter of 2004, EDC did not meet this covenant. On May 3, 2004, EDC negotiated an amendment to the $94 million facility to permit calculation pursuant to U.S. GAAP, which cured the covenant default. We continue to pursue amendment of the $7 million facility. As of March 31, 2004, $56 million of the debt was classified as long-term non-recourse debt in the accompanying consolidated balance sheets.

14. STOCK-BASED COMPENSATION

During the three months ended March 31, 2004, and March 31, 2003, the Company recorded compensation expense of approximately $5 million and $1 million, respectively.

Stock-based compensation awards have been made in 2004 under the 2003 Long Term Compensation Plan, and include awards of non-qualified Stock Options and Restricted Stock Units. Stock Options and Restricted Stock Units granted in 2004 vest in thirds over a three-year period, but the Restricted Stock Units do not mature until the end of a five-year period. Prior to maturity, Restricted Stock Units do not convey ownership rights, including the right to sell the stock, vote, or receive dividends. Restricted Stock Units issued to Officers of the Company vests conditionally over three years, subject to market based criteria. In 2004, Restricted Stock Units were awarded that, if certain conditions of the Restricted Stock Units are satisfied, would result in 1,149,855 shares of Restricted Stock Units awarded to Non-Officers, and 627,013 shares of Restricted Stock Units awarded to Officers of the Company.

15. BENEFIT PLANS

Certain of the Company’s subsidiaries have defined benefit pension plans covering substantially all of their respective employees. Pension benefits are based on ~~actual prices for volumes forecasted~~years of credited service, age of the participant and average earnings. Of the ten defined benefit plans, two of the plans are at U.S. subsidiaries and the remaining plans are at foreign subsidiaries.

Total pension cost for the ~~coming year. Differences between actual power costs incurred over~~three months ended March 31, 2004 and 2003 includes the ~~course~~following components (in millions):

	Pension Costs Three Months Ended March 31,
	2004						2003
	U.S.			Foreign			U.S.			Foreign
Service cost	$	1		$	1		$	1		$	2
Interest cost on projected benefit obligation	7			57			7			48
Expected return on plan assets	(7		)	(33		)	(6		)	(26		)
Amortization of unrecognized actuarial loss	1			1			1			9
Total pension cost	$	2		$	26		$	3		$	33

The scheduled cash flows for foreign employer contributions have not changed significantly from previous disclosures.

IPALCO. In April 2004, pension legislation was passed which decreased the present value of ~~the year due to the exchange rate impact on the price of Itaipu power (which is priced in U.S. dollars)~~IPALCO’s current pension fund liabilities and ~~certain other non-manageable costs are tracked~~lowered IPALCO’s pension funding requirements in the ~~“CVA” account (tracking account),~~short-term. As a result, IPALCO can achieve the minimum desired level of funding in 2004 (90%) with approximately $5.7 million of contributions, which changes its previous estimate of $43 million as of December 31, 2003. Management is ~~supposed~~still evaluating whether it is economically attractive to ~~be remunerated~~discretionally fund in excess of this amount. IPALCO did not make any pension funding contributions during the ~~subsequent year. There are costs pending inclusion in the CVA account such as price variations in bilateral contracts and spot purchases, which are currently under discussion with ANEEL.~~three months ended March 31, 2004.

16. SUBSEQUENT EVENTS

Recourse Debt

On April ~~4, 2003,~~14, 2004, the ~~Ministry~~Company called for redemption $3,084,000 aggregate principal amount of ~~Mines and Energy (“MME”) issued~~its outstanding 10% senior secured notes due 2005. The notes were redeemed on a ~~decree postponing, for~~pro rata basis on May 14, 2004 at a ~~1-year period, the tracking account tariff increase. According~~redemption price equal to ~~this decree, the passing through to tariffs~~100% of the ~~amounts accumulated~~principal amount thereof to be redeemed plus accrued and unpaid interest to the redemption date. The redemption was made out of excess asset sale proceeds and reflects the portion of asset sale proceeds allocable to the notes from an additional $20 million contingent payment received by AES in relation to its March 2003 sale of its equity interests in Mountainview Power Company and Mountainview Power Company LLC.

IPALCO. In April 2004, pension legislation was passed which decreased the present value of IPALCO’s current pension fund liabilities and lowered IPALCO’s pension funding requirements in the ~~tracking account for~~short-term. As a result, IPALCO can achieve the ~~distribution concessionaires that had been scheduled~~minimum desired level of funding in 2004 (90%) with approximately $5.7 million of contributions, which changes its previous estimate of $43 million as of December 31, 2003. Management is still evaluating whether it is economically attractive to ~~occur from April 8, 2003 to April 7, 2004 will be postponed to~~discretionally fund in excess of this amount. IPALCO did not make any pension funding contributions during the ~~subsequent~~three months ended March 31, 2004.

~~year’s tariff adjustment.~~ITEM 2. MANAGEMENTS’ DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary and Overview

AES is a global power company managed to profitably meet the growing demand for electricity. AES is a holding company that through its subsidiaries operates a geographically diversified portfolio of electricity generation and distribution businesses. We seek to capture the benefits of our global expertise and the economies of scale in our operations. Financial flexibility through predictable cash flow and an efficient capital structure, world-class operating performance and a disciplined approach to growth represent the strategic focus of our management efforts.

In connection with these strategic elements, we have concentrated on several key initiatives that have and will continue to have a material impact on our business. These include:

• concentrating on strengthening the operating performance and cost efficiency of our businesses to improve our cash flows, earnings and return on invested capital;

• selling businesses and assets to improve the strength of our balance sheet by reducing financial leverage and improving liquidity;

• restructuring the ownership and financing structure of certain subsidiaries (primarily in South America) to improve their long-term prospects for acceptable returns on invested capital or to extend their previously short-term debt maturities;

• selling or discontinuing several under-performing businesses that no longer meet our investment criteria;

• executing refinancing initiatives designed to primarily improve our parent company financial position and credit quality by paying off debt, lengthening and levelizing maturities, and lowering interest charges.

Operating performance. For the first quarter of 2004, sales increased 18% to $2,257 million from $1,911 million in the first quarter 2003. Gross margin, defined as sales less cost of sales, was $680 million for the first quarter of 2004, also an increase of 18%. As a ~~result,~~percentage of sales, gross margin remained constant at 30% for both years. Also, first quarter of 2004 net cash provided by operating activities was $402 million as compared to $446 million for the first quarter of 2003.

Asset sales. There were no significant sales during the first quarter of 2004 except for the completion of the refinancing and restructuring of certain businesses in Brazil. The Company continues to evaluate its portfolio and business performance and may decide to seek opportunities to sell additional businesses in the future; however, given the improvements in our liquidity there will be a lower emphasis placed on asset sales in the future specifically for the purpose of improving liquidity and strengthening the balance sheet.

Restructuring. During the first quarter of 2004, our subsidiaries completed the BNDES Debt Restructuring related to three of our businesses in Brazil (Eletropaulo, Tiete and Uruguaiana). Eletropaulo also successfully completed a re-profiling of approximately $800 million of outstanding debt. On April 1, 2004, Gener, our subsidiary in Chile, completed its debt recapitalization. Each of these refinancing and restructuring transactions resulted in an extension of maturities, and in the case of ~~Sul~~BNDES and ~~Eletropaulo,~~Gener transactions, also reduced outstanding debt at the ~~pass-through of the tracking account balance for 2003, that should originally happen on April 19, 2003 and July 4, 2003~~amount to approximately $12 million and $173 million, respectively. These amounts will be accumulated in the next twelve months and shall be recovered over a 24-month period rather than the usual 12-month period. BNDES will provide loans to the distribution companies this year, which would be repaid during the recovery period. In the case of Eletropaulo and Sul however, BNDES has already stated that the disbursement of the CVA funds will depend on the successful conclusion of the current negotiation to cure the default under AES Elpa and AES Transgas loans.related subsidiaries.

~~New Model.~~Discontinued operations. ~~On July 21, 2003,~~During the ~~MME released a formal document presenting~~first quarter of 2004, the ~~outlines~~loss from discontinued operations consists primarily of the new sector model. As details are released, the Company will evaluate the effects of the new model. However, the main concerns over the new model relate to the requirement of the distribution companies to forecastresults associated with ~~100% accuracy its projected market demand for a 5-year time period, subject to penalties~~two competitive supply businesses in the ~~case of differences between the projections~~U.S. and the actual demand. The MME has not defined the magnitude of the penalties and therefore it is not possible to evaluate the impact for Eletropaulo and Sul. In addition, there is no methodology established to compensate thea distribution ~~companies~~business in the ~~event~~Dominican Republic, offset in part by a $20 million gain related to our prior sale of government imposed rationing in the future as in 2001. The proposed new model is based on the concept of a single pool that will acquire most of the existing generation capacity as well as any new generation capacity built in the future. The feasibility of the pool is questionableMountainview which was contingent consideration received and may create additional regulatory uncertainty that may seriously impact the ability to attract new investment in the sector. Finally, it is expected that the existing bilateral supply contracts shall be honored and not affecting the existing PPA between Eletropaulo and Tiete nor the contract between Sul and Uruguaiana.

~~Venezuela~~

The political environment and economy in Venezuela continue to be in a state of crisis. The economy has suffered from falling oil revenues, capital flight and a decline in foreign reserves. Over the past year, the country has experienced negative GDP growth, high unemployment, significant foreign currency fluctuations and political instability. Beginning December 2, 2002, Venezuela experienced a forty-five day nationwide general strike that affected a significant portion of the Venezuelan economy, including the city of Caracas and the oil industry. This general strike has affected the normal conduct of EDC’s business. In combination, these circumstances create significant uncertainty surrounding the performance, cash flow and potential for profitability of EDC. However, AES is not required to support the potential cash flow or debt service obligations of EDC. AES’s total investment in EDC at September 30, 2003, was approximately $1.9 billion.

In February 2002, the Venezuelan Government decided not to continue support of the Venezuelan currency, which has caused significant devaluation. As a result of this decision by the Venezuelan government, the U.S. dollar to Venezuelan exchange rate had floated as high as 1,853 before being fixed at 1,600 through September 30, 2003. EDC uses the U.S. dollar as its functional currency. A portion of its debt is denominated in the Venezuelan bolivar, and as of September 30, 2003, EDC has net Venezuelan bolivar monetary liabilities thereby creating foreign currency gains on such debt when the Venezuelan bolivar devalues. During the third quarter of 2003, the Company recorded net pre-tax foreign currency transaction gains of approximately $12 million, as well as approximately $4 million of pre-tax mark to market losses on foreign currency forward and swap contracts. The net foreign currency transaction gains were the result of securities transactions offset by depreciation of the U.S. dollar relative to the euro, which is the currency of some portion of EDC’s debt. The tariffs at EDC are adjusted semi-annually to reflect fluctuations in inflation and the currency exchange rate. EDC obtained tariff increases of 26% during the first ~~half~~quarter of ~~2003 and 10% in September 2003. During the nine months ended September 30, 2003, the Company recorded net pre-tax foreign currency transaction losses~~2004. We currently anticipate that there will be less ongoing activity related to write-offs of ~~approximately $4 million, as well as approximately $5 million of pre-tax mark to market losses on foreign currency forward and swap contracts.~~development or construction projects

Effective January 21, 2003, the Venezuelan Government and the Central Bank of Venezuela (Central Bank) agreed to suspend the trading of foreign currencies in the country for five business days and to establish new standards for the foreign currency exchange regime. On February 5, 2003, the Venezuelan Government and the Central Bank entered into an exchange agreement that governs the Foreign Currency Management Regime, and establishes the applicable exchange rate. The exchange agreement established certain conditions including the centralization of the purchase and sale of currencies within the country by the Central Bank, and the incorporation of the Foreign Currency Management Commission (CADIVI) to administer the execution of the exchange agreement and establish certain procedures and restrictions. The acquisition of foreign currencies is subject to the prior registration of the interested party and the issuance of an authorization to participate in the exchange regime. Furthermore, CADIVI governs the provisions of the exchange agreement, defines the procedures and requirements for the administration of foreign currencies for imports and exports, and authorizes purchases of currencies in the country. The exchange rates set by such agreements are 1,596 bolivars per U.S. dollar for purchases and 1,600 bolivars per U.S. dollar for sales. These actions may impact the ability of EDC to distribute cash to the parent. The financial statements for the third quarter of 2003 used the official exchange rate of 1,600 bolivars per U.S. dollar to translate the results of operations for the portion of the first quarter that exchange controls were in place. However, if the Company had used the last traded exchange rate of 1,853 bolivars per U.S. dollar prior to the effectiveness of exchange controls, pre-tax income for the nine months ended September 30, 2003 would have increased by approximately $11 million primarily due to gains that would have been

3626

~~realized~~and impairment charges in the future. The Company continues to evaluate the potential future impacts of the changes in the economic, regulatory and political environment in the Dominican Republic to determine the effect, if any, on ~~bolivar-denominated debt.~~our generation businesses in that country.

~~In a Resolution passed on April 14, 2003, CADIVI published a list~~Refinancing. During the first quarter of import duty codes identifying goods that have been approved for foreign currency purchases by registered companies. On April 28, 2003, CADIVI notified EDC that its registration to import such goods had been approved. On April 22, 2003, CADIVI published the general procedures regarding the acquisition of foreign currency for payments of external2004, we reduced recourse debt ~~entered into by private companies prior to January 22, 2003. EDC was able to obtain $12 million~~ at the ~~official rate~~parent by $350 million, refinanced $500 million of outstanding secured debt with an issuance of $500 million of unsecured notes issued at a price of 98.288% with interest at annual coupon rates of 7.75% that mature in 2014. We also increased the amount available under our parent company revolving credit facility to ~~service external debt in July 2003. Also, in January 1999, a joint resolution~~$450 million from its previous amount of the Ministry of Energy and Mines and the Ministry of Industry and Commerce established the basic tariff rates applicable during the Four Year Tariff Regime from 1999 through 2002. The tariffs were established by the Ministry of Energy and Mines using a combination of cost-plus and return on investment methodologies.$250 million.

~~United Kingdom~~We report our financial results in four business segments: contract generation, competitive supply, large utilities and growth distribution. These segments are grouped further to report our regulated and non-regulated businesses. Regulated revenues include our large utilities and growth distribution segments, and non-regulated revenues include our contract generation and competitive supply segments. See Note 9 to our quarterly financial statements included in this report for a discussion of our segments.

~~On October 3, 2003, AES Drax Power Limited (“Drax”) changed its name~~Contract Generation. In general, these power plants have contractually limited their exposure to ~~Drax Power Limited to reflect the withdrawal~~commodity price risks, primarily electricity price volatility, by entering into longer term (originally five years or longer) power sales agreements for 75% or more of ~~AES from the operation of the Drax power plant in August 2003. Drax Power Limited, a former subsidiary of AES, is the operator of the Drax power plant, Britain’s largest power station.~~

Since December 12, 2002, Drax has been operating under standstill arrangements with its senior creditors. These standstill arrangements were initially included in the “Original Standstill Agreement”, and, after expiration thereof on May 31, 2003, under the “Further Standstill Agreement,” and, after expiration thereof on June 30, 2003 under the “Third Standstill Agreement” and, after expiration thereof on August 14, 2003, under the Fourth Standstill Agreement, which expired on September 30, 2003. We understand, solely based on the publicly filed information contained in Drax’s Form 6-K filed on October 28, 2003, that Drax has entered into an additional standstill agreement, called the “Long Term Standstill Agreement” which became effective on October 9, 2003 and will expire on December 31, 2003, unless terminated earlier or extended in accordance with its terms. Drax has publicly disclosed that these standstill agreements have been entered into for the purpose of providing Drax and its senior creditors with a period of stability during which discussions regarding a consensual restructuring (the “Restructuring”) could take place. The standstill agreements provide temporary and/or permanent waivers by certain of the senior lenders of defaults that have occurred or could occur up to the expiration of the standstill period, including a permanent waiver resulting from termination of the Hedging Agreement.

Based on negotiations through the end of June 2003, Drax, AES and the steering committee (the “Steering Committee”) representing the syndicate of banks (the “Senior Lenders”), which financed the Eurobonds issued by Drax to finance the acquisition of the Drax power plant, and the ad hoc committee formed by holders of Drax’s Senior Bonds (the “Ad Hoc Committee” and, together with the Steering Committee, the “Senior Creditors Committees”), reached agreement on more detailed terms of the Restructuring, and each of the Senior Creditors Committees, Drax and AES indicated their ~~support for a Restructuring to be implemented based upon the proposed restructuring terms (the “June Restructuring Proposal”) that was published by Drax on Form 6-K on June 30, 2003.~~

~~As a consequence of the foregoing, Drax was not permitted to make any distributions to Drax Energy.~~output capacity. As a result, ~~Drax Energy was unable~~they are better able to ~~make~~project their fuel supply requirements and generally enter into long-term agreements for most of their fuel supply requirements, thereby limiting their exposure to short-term fuel price volatility. Some of these facilities have “tolling” type arrangements in which the ~~full amount~~counterparty to the power sales agreement assumes the risks associated with providing the necessary fuel. As a result, our contract generation business generally produces more predictable cash flow and earnings.

The contract generation segment’s earnings and cash flows may be significantly affected by (1) the availability of generating capacity at our existing facilities, (2) newly completed projects or acquisitions of generating facilities, (3) dispositions, (4) demand for power beyond minimum requirements under the power sales agreements, (5) prices for power and fuel supply requirements, (6) the credit quality of the ~~interest payment~~counterparties to our power sales agreements (7) changes in our operating cost structure, including costs associated with operation, maintenance and repair, transmission access, insurance and environmental compliance, including expenditures relating to environmental emission equipment or environmental remediation, (8) changes in laws or regulations, and (9) changes in the foreign currency exchange rates for certain of ~~$11.5 million~~our facilities outside the United States.

Competitive Supply. These power plants sell electricity directly to wholesale customers in competitive markets; however, in contrast to the contract generation segment discussed above, these facilities generally sell less than 75% of their output under long-term contracts. They often sell into power pools under shorter-term contracts or into daily spot markets. These prices are less predictable and ~~£7.6 million due~~can be volatile. As a result, our operational results in this segment are more sensitive to the impact of market fluctuations in the prices of electricity, natural gas, coal, oil and other fuels. Because these facilities do not have long-term contracts, it is also more difficult to forecast the amount and price of fuel needed to support future production. We hedge a portion of their performance against the effects of fluctuations in energy commodity prices using such strategies as commodity forward contracts, futures, swaps and options. These businesses also have more significant needs for working capital or credit to support their operations.

The competitive supply segment’s earnings and cash flows may be significantly affected by: (1) the availability of generating capacity at our existing facilities, (2) newly completed projects or acquisitions of generating facilities, (3) dispositions, (4) demand for power, which can be significantly affected by weather, (5) prices for fuel supply requirements, (6) changes in our operating cost structure, including costs associated with operation, maintenance and repair, transmission access, insurance and environmental compliance, including expenditures relating to environmental emission equipment or environmental remediation, (7) changes in laws or regulations, and (8) changes in the foreign currency exchange rates for our facilities outside the United States.

Large Utilities. Our large utilities segment consists of our interests in three large utilities located in the U.S. (IPL), Brazil (Eletropaulo) and Venezuela (EDC). All three of these electric utilities are of significant size and maintain a monopoly franchise within a defined service area. These utilities each have transmission and distribution capabilities and IPL and EDC also have generating facilities. Our large utilities are subject to extensive regulation relating to ownership, marketing, delivery and pricing of electricity and gas with a focus on ~~its high-yield notes on February 28, 2003. Drax Energy’s failure~~protecting customers. Large utility revenues result primarily from retail electricity sales to ~~make~~customers under regulated tariff or concession agreements and to a lesser extent from contractual agreements of varying lengths and provisions.

The large utility segment’s earnings and cash flows may be significantly affected by: (1) demand for power, which can be significantly affected by weather, (2) prices for power and fuel supply requirements, (3) the ~~full amount~~extent of commercial losses, which result, for example, when customers connect to our system without paying, (4) changes in our operating cost structure, including costs associated with operation, maintenance and repair, insurance and environmental compliance, including expenditures relating to environmental emissions or environmental remediation, (5) changes in laws or regulation, including changes in electricity tariff rates and our ability to obtain tariff adjustments for increased expenses, and (6) changes in the foreign currency exchange rates in Brazil and Venezuela.

Growth Distribution. Our growth distribution segment is comprised of our interests in electricity distribution facilities located in developing countries where the demand for electricity is expected to grow at a higher rate than in more developed parts of the ~~required interest payment constituted an event~~world. Often however, these businesses face particular challenges associated with their presence in developing countries such as outdated equipment, significant electricity theft-related losses, cultural problems associated with customer safety and non-payment, emerging economies, and potentially less stable governments or regulatory regimes.

The growth distribution segment’s earnings and cash flows may be significantly impacted by: (1) changes in economic growth, (2) demand for power, which can be significantly affected by weather, (3) changes in laws or regulations, including changes in electricity tariff rates and our ability to obtain tariff adjustments for increased expenses, (4) the extent of ~~default under its high-yield notes. The high yield note holders delivered a notice of acceleration on May 19, 2003~~commercial losses, which result, for example, when customers connect to our system without paying, (5) changes in our operating cost structure, including costs associated with operation, maintenance and ~~delivered the required notices under the intercreditor arrangements on May 28, 2003. Pursuant~~repair, insurance and environmental compliance, including expenditures relating to intercreditor agreements, the holders of the high-yield notes had no enforcement rights until 90 days following the delivery of such notices, which 90-day period expired on August 26, 2003. Drax was previously reportedenvironmental emission equipment or environmental remediation and (6) changes in the ~~competitive supply segment.~~foreign currency exchange rates.

3727

Results of Operations

~~THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2002~~Revenues

~~Revenues~~Overview

Revenues increased ~~$426~~$346 million, or ~~22%~~18%, to $2.3 billion during the ~~three months ended September 30, 2003~~first quarter of 2004 compared to $1.9 billion for the ~~three months ended September 30, 2002.~~first quarter of 2003. The increase in revenues is due to new operations from greenfield projects ~~improved electricity prices,~~and tariff increases, particularly in North America, and the 2002 provision for the Brazilian regulatory decision at Sul. These factors were offset by the effect of foreign currency devaluation and milder weather conditions. AES is a global power company which operates in 28 countries around the world.South America. The breakdown of AES’s revenues for the three ~~month periods~~months ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ based on the business segment and geographic region in which they were earned, is set forth below.

Three Months Ended
September 30, 2003

Three Months Ended
September 30, 2002

%
Change

(in $millions)

Large Utilities:

North America

$
221

$
227

(3
)%
South America

523

418

25
%
Caribbean*

164

138

19
%
Total Large Utilities

$
908

$
783

16
%

Growth Distribution:

South America

$
113

$
89

27
%
Caribbean*

115

137

(16
)%
Europe/Africa

81

72

13
%
Total Growth Distribution

$
309

$
298

4
%

Total Regulated Revenues

$
1,217

$
1,081

12
%

*Regulated Revenues ~~Includes Venezuela and Colombia~~

~~Regulated revenues.~~Regulated revenues increased ~~$136~~$180 million, or ~~12%~~19%, to ~~$1,217 million~~$1.1 billion for the ~~third~~first quarter of ~~2003~~2004 compared to the same period in ~~2002. Regulated~~2003. Generally regulated revenues increased ~~most notably~~due to tariff increases at Eletropaulo ~~EDC, Sonel, Eden, Edes~~ and ~~Edelap.~~EDC. These effects were partially offset by ~~the effect of foreign currency devaluation, and milder weather conditions.~~a slight reduction in revenues at IPALCO. Regulated revenues will continue to be impacted by ~~temperatures that vary from normal in the state of Indiana and the metropolitan area of Sao Paulo, Brazil, as well as~~ fluctuations in the value of Brazilian ~~Venezuelan~~ and Argentine currencies.

	March 31, 2004				March 31, 2003				Change
	Three Months Ended Amount		% of Total Revenues		Three Months Ended Amount		% of Total Revenues		Three Months Ended Variance			% Change
	(in $ millions)
Large Utilities:
North America	$	215	10	%	$	217	11	%	$	(2	)	(1	)%

South America	457		20	%	358		19	%	99			28	%

Caribbean*	146		6	%	127		7	%	19			15	%

Total Large Utilities	$	818	36	%	$	702	37	%	$	116		17	%

Growth Distribution:

South America	$	126	6	%	$	89	5	%	$	37		42	%

Caribbean*	84		4	%	88		5	%	(4		)	(5	)%

Europe/Africa	118		5	%	87		4	%	31			36	%

Total Growth Distribution	$	328	15	%	$	264	14	%	$	64		24	%
Total Regulated Revenues	$	1,146	51	%	$	966	51	%	$	180		19	%

* Includes Venezuela

Large Utilities

Large utilities revenues increased ~~$125~~$116 million, or ~~16%~~17%, to ~~$908~~$818 million for the ~~third~~first quarter of ~~2003 from $783 million for~~2004 compared to $702 in the ~~third quarter~~same period of ~~2002,~~2003, which was comprised of increases at EDC and Eletropaulo, partially offset by a ~~slight decline~~decrease at ~~IPALCO.~~IPALCO due to a scheduled outage of a major electricity unit. Revenues at both Eletropaulo and EDC increased ~~$26 million~~ during the three months ended September 30, 2003 due to a 17% increase in demand and the effect of tariff increases obtained in 2003. This improvement was partially offset by devaluation of the Venezuelan bolivar compared to the year-ago period. Economic activity at Eletropaulo increased in 2003 as demonstrated by greater residential and commercial consumption resulting from the end of rationing in February 2002. However, this increase was partially offset by weaker demand from industrial customers. The net result of these factors was a $105 million increase in net revenues in 2003. The Company began consolidating Eletropaulo in February 2002 when control of the business was obtained. Revenues at IPALCO decreased $6 ~~million in the third quarter of 2003~~March 31, 2004 as a result of ~~milder weather. There were 67 more heating degree days but 344 fewer cooling degree days~~several factors. First, both EDC and Eletropaulo recorded higher revenues due to tariff increases during the ~~three months ended September 30, 2003~~first quarter of 2004 than the first quarter of 2003. At Eletropaulo, revenues additionally increased as a result of an appreciation of the Brazilian Real in the first quarter of 2004 compared to the first quarter of 2003. These increases at Eletropaulo were slightly offset by a reduction in sales volume in the first quarter of 2004 compared to the same period in ~~2002. Retail revenues decreased $6 million, or 3%, mostly due~~2003. At EDC, the tariff increase was partially offset by a devaluation of the Venezuelan Bolivar relative to ~~a 6% decrease in kWh volume. The $1 million increase in wholesale revenues at IPALCO was primarily due to a 6% increase in~~ the ~~average price per kWh sold as well as a 4% increase in the quantity of wholesale kWh sold.~~U.S. Dollar.

Growth Distribution

Growth distribution revenues increased ~~$11~~$64 million, or 4%24%, to ~~$309~~$328 million for the ~~third~~first quarter of ~~2003~~2004 from ~~$298~~$264 million for the ~~third~~first quarter of ~~2002.~~2003. Overall, segment revenues increased ~~$24~~$37 million in South America, ~~and $9~~increased $31 million in Europe/Africa, and decreased ~~$22~~$4 million in the Caribbean. The increase in South America was primarily due to ~~improved revenues~~an increase at Sul ~~resulting from a 16% tariff increase~~ in ~~2003. Revenue increases were also experienced at SONEL, Eden Edes, Edelap CAESS,~~Brazil caused by increased tariffs and ~~AES Rivnooblenergo offset by a decline at Ede Este.~~

Three Months Ended
September 30, 2003

Three Months Ended
September 30, 2002

%
Change

(in millions)

Contract Generation:

North America

$
237

$
225

5
%
South America

239

183

31
%
Caribbean*

120

40

200
%
Europe/Africa

103

81

27
%
Asia

118

70

69
%
Total Contract Generation

$
817

$
599

36
%

Competitive Supply:

North America

$
177

$
118

50
%
South America

33

20

65
%
Caribbean*

24

19

26
%
Europe/Africa

34

42

(19
)%
Asia

20

17

18
%
Total Competitive Supply

$
288

$
216

33
%

Total Non-Regulated Revenues

$
1,105

$
815

36
%

* ~~Includes Venezuela and Colombia~~

~~Non-regulated revenues.~~ ~~Non-regulated revenues increased $290 million, or 36%, to $1,105 million for~~appreciation of the ~~third~~Brazilian Real in the first quarter of ~~2003~~2004 compared to the first quarter of 2003. Also, favorable currency effects in Argentina helped improve revenue results in the first quarter of 2004 compared to the same period in ~~2002.~~2003. This effect on segment revenues was increased further by improved revenues at SONEL in Cameroon and businesses located in the Ukraine.

Non-Regulated Revenues

Non-regulated revenues increased $166 million, or 18%, to $1.1 billion for the first quarter of 2004 compared to the same period in 2003. This increase was primarily the result of placing new greenfield projects into service subsequent to ~~September 30, 2002,~~March 31, 2003, and improved ~~electricity prices in the U.S., and increased production offset by the effects of foreign currency devaluation.~~operating results. Non-regulated revenues will continue to be strongly influenced by weather and market prices for electricity, particularly in the Northeastern U.S.

	March 31, 2004				March 31, 2003				Change
	Three Months Ended Amount		% of Total Revenues		Three Months Ended Amount		% of Total Revenues		Three Months Ended Variance			% Change
	(in $ millions)
Contract Generation:
North America	$	217	10	%	$	206	11	%	$	11		5	%

South America	265		12	%	204		11	%	61			30	%

Caribbean*	131		6	%	113		6	%	18			16	%

Europe/Africa	124		5	%	112		6	%	12			11	%

Asia	131		6	%	81		4	%	50			62	%

Total Contract Generation	$	868	38	%	$	716	37	%	$	152		21	%

Competitive Supply:
North America	$	114	5	%	$	122	6	%	$	(8	)	(7	)%

South America	31		1	%	24		1	%	7			29	%

Caribbean*	30		1	%	19		1	%	11			58	%

Europe/Africa	32		1	%	37		2	%	(5		)	(14	)%

Asia	36		2	%	27		2	%	9			33	%

Total Competitive Supply	$	243	11	%	$	229	12	%	$	14		6	%
Total Non-Regulated Revenues	$	1,111	49	%	$	945	49	%	$	166		18	%

* Includes Venezuela

Contract Generation

Contract generation revenues increased ~~$218~~$152 million, or ~~36%~~21%, to ~~$817~~$868 million for the ~~third~~first quarter of ~~2003~~2004 from ~~$599~~$716 million for the ~~third~~first quarter of ~~2002,~~2003, principally due to revenues from greenfield projects put into operation subsequent to ~~the third quarter of 2002~~March 31, 2003 and revenue enhancements at other businesses. New greenfield projects include ~~Red Oak in North America, Puerto Rico and~~ Andres in the Caribbean and ~~Barka and Ras Laffan~~Kelanitissa in Asia. Among existing businesses, ~~significant~~ revenue improvements were ~~made~~experienced at Gener ~~and Tiete~~ in South America, ~~Southland~~Kilroot in Europe/Africa, and Shady Point and Thames in North America, Los Mina and Merida in the Caribbean, and Kilroot, Tisza, and Ebute in Europe/Africa. This increase was partially offset by lower revenues at Shady Point in North America, Uruguaiana in South America, and Lal Pir and Pak Gen in Asia. Contract generation revenues increased in all regions.America.

Competitive Supply

Competitive supply revenues increased ~~$72~~$14 million, or ~~33%~~6%, to ~~$288~~$243 million for the ~~third~~first quarter of ~~2003~~2004 from ~~$216~~$229 million for the ~~third~~first quarter of ~~2002.~~2003. The increase in competitive supply revenues was ~~mostly~~ due to increases in South America and the Caribbean offset by a ~~$59 million revenue improvement at our businesses~~slight decrease in Europe/Africa and North America. $31 million of this increase was due to the start of commercial operations at Granite Ridge and $23 million was due to the start of commercial operations at Wolf Hollow subsequent to September 30, 2002. The remaining revenue increase in North America was due to improved electricity prices in New York.In South America, revenues increased ~~$13 million~~primarily due to increased ~~production~~output at ~~the Argentine businesses.~~Parana in Argentina. Lower capacity revenues in North America primarily offset revenue increases from tariff adjustments at Ekibastuz in Asia.

Gross Margin

Overview

Three Months
Ended September 30,
2003

% of Revenue

Three Months
Ended September 30,
2002

% of Revenue

%
Change

(in $millions)

(in $millions)

Large Utilities:

North America

$
83

38
%
$
92

41
%
(10
)%
South America

92

18
%
64

15
%
44
%
Caribbean*

69

42
%
43

31
%
60
%
Total Large Utilities

$
244

27
%
$
199

25
%
23
%

Growth Distribution:

South America

$
28

25
%
$
27

30
%
4
%
Caribbean*

3

3
%
16

12
%
(81
)%
Europe/Africa

(1
)
(1
)%
5

7
%
(120
)%
Total Growth Distribution

$
30

10
%
$
48

16
%
(38
)%

Total Regulated Gross Margin

$
274

23
%
$
247

23
%
11
%
*                                         ~~Includes Venezuela and Colombia~~
40

~~Regulated gross margin.~~ ~~Regulated gross margin, which represents total revenues reduced by cost of sales,~~Gross Margin increased ~~$27~~$106 million, or ~~11%~~19%, to ~~$274~~$680 million during the first quarter of 2004 compared to $574 million for the ~~third~~first quarter of ~~2003 from $247 million compared to the same period in 2002.~~2003. The increase in ~~regulated~~ gross margin is ~~mainly~~ due to ~~improvements at Eletropaulo and EDC offset by weaker margins at IPALCO and Ede Este. Regulated gross margin as a percentage of revenues remained constant at 23% for each period.~~
Large utilities gross margin increased $45 million, or 23%, to $244 million for the third quarter of 2003 from $199 million for the third quarter of 2002. Gross margin increased $28 million at Eletropaulo due to increased revenues and lower purchased energy costs. Gross margin at EDC increased $25 million in 2003 primarily due to lower fuel costs and increased revenues, partially offset by ~~the effect of foreign~~ currency ~~devaluation. IPALCO’s gross margin decreased $9 million in 2003 due to lower revenues, increased maintenance~~fluctuations, higher fuel and higher costs associated with their NOx compliance construction program, and increased depreciation costs.    The large utilities gross margin as a percentage of revenues increased to 27% for the third quarter of 2003 from 25% for the third quarter of 2002.purchased energy. Gross ~~margin ratios decreased in North America and improved in South America, and the Caribbean.~~
Growth distribution gross margin decreased $18 million, or 38%, to $30 million for the third quarter of 2003 from $48 million for the third quarter of 2002. Gross margin decreased $13 million in the Caribbean mainly due to lower revenues, higher fuel costs, and unfavorable foreign exchange rates at Ede Este partially offset by improved margin at CAESS. The growth distribution gross margin as a percentage of revenues declined to 10% for the third quarter of 2003 from 16% for the third quarter of 2002.

Three Months
Ended September 30,
2003

% of Revenue

Three Months
Ended September 30,
2002

% of Revenue

%
Change

(in $millions)

(in $millions)

Contract Generation:

North America

$
116

49
%
$
113

50
%
3
%
South America

100

42
%
70

38
%
43
%
Caribbean*

28

23
%
7

18
%
NM

Europe/Africa

25

24
%
23

28
%
9
%
Asia

58

49
%
29

41
%
100
%
Total Contract Generation

$
327

40
%
$
242

40
%
35
%

Competitive Supply:

North America

$
20

11
%
$
32

27
%
(38
)%
South America

17

52
%
8

40
%
113
%
Caribbean*

10

42
%
8

42
%
25
%
Europe/Africa

3

9
%
1

2
%
200
%
Asia

3

15
%
1

6
%
200
%
Total Competitive Supply

$
53

18
%
$
50

23
%
6
%

Total Non-Regulated Gross Margin

$
380

34
%
$
292

36
%
30
%
*                                         ~~Includes Venezuela and Colombia~~
~~NM - - Not Meaningful~~
41

~~Non-regulated gross margin.~~ Non-regulated gross margin increased $88 million, or 30%, to $380 million for the third quarter of 2003 from $292 million during the same period in 2002. The overall increase in non-regulated gross margin is mainly due to operational improvements at our contract generation businesses. Non-regulated gross margin as a percentage of revenues declined from 36% during the third quarter of 2002 to 34% for the third quarter of 2003.
Contract generation gross margin increased $85 million, or 35%, to $327 million for the third quarter of 2003 from $242 million for the third quarter of 2002 and included improvements in each region. The contract generation gross margin as a percentage of revenues remained consistent at ~~40%~~30% in ~~each period. South America gross margin increased $30 million due to improvements at Gener in Chile and Tiete in Brazil. Caribbean gross margin increased $21 million mostly due to~~ the commencement of commercial operations at Puerto Rico subsequent to September 30, 2002. Europe/Africa gross margin increased $2 million due to increased production at Ebute and Kilroot. North America gross margin increased $3 million mainly due to lower margins at Warrior Run, Shady Point and Beaver Valley offset by improvements at Red Oak. Asia gross margin increased $29 million mainly due to positive gross margins from greenfield projects at Barka and Ras Laffan.
~~Competitive supply gross margin increased $3 million, or 6%, to $53 million for the third~~first quarter of 2003 from $50 million for the third quarter of 2002. Competitive supply gross margin as a percentage of revenues decreased to 18% for the third quarter of 2003 from 23% for the third quarter of 2002. Gross margin increased in all regions except North America. North America gross margin decreased $12 million due to lower gross margins at Deepwater and the Granite Ridge greenfield project offset by increased gross margin at our New York plants due to improved electricity prices and demand. South America gross margin increased $9 million mainly due to operational improvements at our Argentine businesses. Less significant margin increases were experienced in Europe/Africa, the Caribbean and Asia.
~~Selling, general and administrative expenses.~~ ~~Selling, general and administrative expenses increased $26 million to $36 million for the third quarter of 2003~~2004 compared to the same period in ~~2002. Selling, general and administrative costs as a percentage~~2003. The breakdown of ~~revenues were 2% and 1% for the third quarters of 2003 and 2002, respectively. The increase was primarily caused by the Company’s shift to a more centralized organizational structure.~~
~~Interest expense.~~   Interest expense increased $33 million, or 7%, to $504 million for the third quarter of 2003 compared to the same period in 2002. Interest expense as a percentage of revenue decreased from 25% during the third quarter of 2002 to 22% for the third quarter of 2003. Interest expense increased primarily due to the interest expense at new businesses, penalties incurred at businesses in default, and additional corporate interest costs arising from the senior debt issued within the past twelve months at higher interest rates to refinance prior obligations at lower interest rates.
~~Interest income.~~ Interest income increased $10 million, or 14%, to $82 million for the third quarter of 2003 compared to the same period in 2002. Interest income as a percentage of revenue remained constant at 4% for the third quarter of 2003 and 2002.
~~Other expense.~~ Other expense increased slightly to $29 million for the third quarter of 2003 compared to $28 million for the third quarter of 2002. Other expense primarily consists of losses on the sale of assets and extinguishment of liabilities, write off of debt financing costs, settlement of legal disputes, and marked-to-market losses on commodity derivatives. See Note 7 to the consolidated financial statements for a summary of other expense.
~~Other income.~~ Other income decreased $15 million to $36 million for the third quarter of 2003 compared to the same period in 2002. Other income primarily includes gains from early extinguishment of liabilities, settlement of legal disputes, and marked-to-market commodity derivatives. See Note 7 to the consolidated financial statements for a summary of other income.
~~Loss on sale or write-down of investments and asset impairment expense.~~ Loss on sale or write-down of investments and asset impairment expense decreased $93 million to $75 million for the third quarter of 2003 compared to the same period in 2002. This amount represents the write-off of capitalized costs associated with the Bujagali project in the third quarter of 2003 due to our termination of the project. The Company recorded an impairment charge of $168 million on the AES Greystone project in connection with its sale during the third quarter of 2002.
~~Foreign currency transaction gains (losses).~~ The Company recognized foreign currency transaction losses of $39 million during the third quarter of 2003 compared to losses from foreign currency transactions of $243 million in the third quarter of 2002. Foreign currency transaction losses were primarily due to a 4% devaluation of the Argentina Peso from 2.75 at June 30, 2003 to 2.87 at September 30, 2003, which resulted in $15 million of foreign currency transaction lossesAES’s gross margin for the three months ended ~~September 30, 2003. Additionally, a 2% devaluation occurred in the Brazilian real from 2.87 at June 30,~~March 31, 2004 and 2003, to 2.92 at September 30, 2003. As a result of this devaluation, the Company recorded Brazilian foreign currency losses of $29 million for the three months ended September 30, 2003. These losses were partially offset by $12 million of foreign transaction gains recorded at EDC for the three months ended September 30, 2003. Additionally, in the third quarter of 2003, Ede Este, a growth distribution business located in the Dominican Republic, experienced foreign currency
42

~~transaction losses of $4 million, and the Company’s generation businesses in Pakistan experienced $3 million of foreign currency transaction losses.~~
~~Equity in pre-tax earnings (losses) of affiliates.~~ The Company recorded $12 million of equity in pre-tax earnings of affiliates during the third quarter of 2003 compared to $20 million of losses during the third quarter of 2002. Equity in earnings of affiliates improved in 2003 due to increased earnings at our investment in the Chigen affiliates and $42 million of foreign currency transaction losses included in the 2002 amount.
~~Income tax expense (benefit).~~ Income taxes on continuing operations (including income taxes on equity in earnings) changed to an expense of $20 million for the third quarter of 2003 from a benefit of $91 million during the third quarter of 2002. The effective tax rate changed from a tax benefit at a 31% effective rate in 2002 to tax expense at a 30% effective tax rate in 2003.
~~Minority interest in net income (losses) of subsidiaries.~~ The Company recorded $35 million of minority interest expense during the third quarter of 2003 compared to $20 million during the third quarter of 2002. Increased minority interest expense in large utilities and contract generation were somewhat offset by decreased growth distribution and competitive supply minority interest expense.
Large utilities minority interest changed from a benefit of $17 million in the third quarter of 2002 to expense of $7 million in the third quarter of 2003. Minority interest expense increased by $22 million at Eletropaulo and CEMIG, and increased by $2 million at EDC.
Growth distribution minority interest changed to a benefit of $10 million for the third quarter of 2003 compared to expense of $5 million for the third quarter of 2002. $11 million of additional minority interest income was recorded in 2003 at Ede Este and $3 million of additional minority interest income was recorded in 2003 at our businesses in South America.
Contract generation minority interest expense increased $19 million to $31 million in the third quarter of 2003 compared to expense of $12 million in the third quarter of 2002. The change is primarily due to greater earnings shared with our minority partners in Tiete in Brazil, and sharing of earnings with our minority partners in the Barka and Ras Laffan greenfield projects that were placed into service subsequent to September 30, 2002.
Competitive supply minority interest expense decreased by $13 million to expense of $6 million in the third quarter of 2003 compared to expense of $19 million in the third quarter of 2002. The change in competitive supply minority interest is primarily due to sharing of earnings in the third quarter of 2002 at Parana.
~~Income (loss) from continuing operations.~~ Income from continuing operations improved $253 million to income of $46 million for the third quarter of 2003 from a loss of $207 million for the third quarter of 2002. The improvement was primarily due to improved gross margin, decreased losses from foreign currency transactions, and larger investment write downs and asset impairment charges in 2002. These changes were slightly offset by greater selling, general and administrative expenses and interest expense in 2003.
~~Loss from operations of discontinued businesses.~~ ~~During the third quarter of 2003, the Company recorded $30 million of income from operations of discontinued businesses compared to $108 million of losses during the third quarter of 2002, net of tax.~~
~~Net income (loss).~~ The Company recorded net income of $76 million and a net loss of $315 million for the third quarters of 2003 and 2002, respectively. Much of this change is due to income from discontinued operations in 2003, increased gross margin, lower losses from impairment charges, and favorable changes in foreign currency exchange rates.
~~NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002~~
~~Revenues~~
Revenues increased $622 million, or 11%, to $6.3 billion during the nine months ended September 30, 2003 compared to $5.7 billion for the nine months ended September 30, 2002. The increase in revenues is due to new operations from greenfield projects, favorable weather conditions and improved electricity prices, particularly in North America. These factors were offset by the effect of foreign currency devaluation. AES is a global power company which operates in 28 countries around the world. The breakdown of AES’s revenues for the nine month periods ended September 30, 2003 and 2002, based on the business segment and geographic region in which they were earned, is set forth below.

43

Nine Months Ended
September 30, 2003

Nine Months Ended
September 30, 2002

%
Change

(in millions)

Large Utilities:

North America

$
628

$
621

1
%
South America

1,322

1,304

1
%
Caribbean*

437

489

(11
)%
Total Large Utilities

$
2,387

$
2,414

(1
)%

Growth Distribution:

South America

$
311

$
195

59
%
Caribbean*

376

409

(8
)%
Europe/Africa

254

210

21
%
Total Growth Distribution

$
941

$
814

16
%

Total Regulated Revenues

$
3,328

$
3,228

3
%
*                                         ~~Includes Venezuela and Colombia~~
~~Regulated revenues.~~ Regulated revenues increased $100 million, or 3%, to $3,328 million for the nine months ended September 30, 2003 compared to the same period in 2002. Generally, regulated revenues increased due to the 2002 provision for the Brazilian regulatory decision at Eletropaulo and Sul, and revenue improvements at IPALCO, Sonel, Kievoblenergo and Rivnooblenergo. These effects were partially offset by reduced revenues at EDC and at our Caribbean growth distribution businesses. Regulated revenues will continue to be impacted by temperatures that vary from normal in the state of Indiana and the metropolitan area of Sao Paulo, Brazil, as well as fluctuations in the value of Brazilian and Argentine currencies.
Large utilities revenues decreased $27 million, or 1%, to $2,387 million for the nine months ended September 30, 2003 from $2,414 million for the same period of 2002, which was comprised of a decrease at EDC partially offset by increases at IPALCO and Eletropaulo. Revenues at EDC declined $52 million during the nine months ended September 30, 2003 due to the effect of reduced demand and foreign currency devaluation partially offset by a tariff increase received in 2003. Economic activity at Eletropaulo increased in 2003 as demonstrated by a 14% increase in GWH sales over the same period in 2002 partly resulting from the end of rationing in February 2002. Additionally, the increase at Eletropaulo is due to the 2002 provision for the Brazilian regulatory decision. The Company began consolidating Eletropaulo in February 2002 when control of the business was obtained. Revenues at IPALCO increased $7 million in 2003 as a result of greater retail and wholesale revenues and favorable weather conditions. There were 616 additional heating degree days, but 526 fewer cooling degree days during the nine months ended September 30, 2003 compared to the same period in 2002. Retail revenues increased $1 million mostly due to a 1% increase in average price per kWh sold. The $7 million increase in wholesale revenues was primarily due to a 35% increase in the average price per kWh sold, partially offset by a 5% decrease in the quantity of wholesale kWh sold.
~~Growth distribution revenues increased $127 million, or 16%, to $941 million for the nine months ended September 30, 2003 from $814 million for the same period in 2002.~~ Overall, segment revenues increased $116 million in South America and $44 million in Europe/Africa, and decreased $33 million in the Caribbean. The increase in South America was primarily due to the 2002 provision of $145 million for the Brazilian regulatory decision at Sul offset by the devaluation of the Brazilian real from the first nine months of 2002 to the first nine months of 2003. Revenues also increased at SONEL, Kievoblenergo and Rivnooblenergo in Europe/Africa, and at CLESA and CAESS in the Caribbean offset by a decrease at Ede Este.

Nine Months Ended
September 30, 2003

Nine Months Ended
September 30, 2002

%
Change

(in millions)

Contract Generation:

North America

$
655

$
630

4
%
South America

666

647

3
%
Caribbean*

355

113

214
%
Europe/Africa

309

260

19
%
Asia

283

233

21
%
Total Contract Generation

$
2,268

$
1,883

20
%

Competitive Supply:

North America

$
417

$
299

39
%
South America

79

56

41
%
Caribbean*

67

60

12
%
Europe/Africa

100

117

(15
)%
Asia

69

63

10
%
Total Competitive Supply

$
732

$
595

23
%

Total Non-Regulated Revenues

$
3,000

$
2,478

21
%
*                                         ~~Includes Venezuela and Colombia~~
4431

~~Non-regulated revenues.~~Regulated Gross Margin Non-regulated revenues increased $522 million, or 21%, to $3,000 million for the nine months ended September 30, 2003 compared to the same period in 2002. This increase was primarily the result of placing new greenfield projects into service, improved electricity prices in the U.S., and increased production offset by the effects of foreign currency devaluation. Non-regulated revenues will continue to be strongly influenced by weather and market prices for electricity in the U.K. and the Northeastern U.S.

Contract generation revenues increased $385 million, or 20%, to $2,268 million for the nine months ended September 30, 2003 from $1,883 million for the same period in 2002, principally due to revenues from greenfield projects and revenue enhancements at other businesses. New greenfield projects include Red Oak in North America, Puerto Rico and Andres in the Caribbean and Barka and Ras Laffan in Asia. Among existing businesses, significant revenue improvements were made at Southland in North America, Los Mina and Merida in the Caribbean, and Tisza and Ebute in Europe/Africa. Contract generation revenues increased in all regions.
Competitive supply revenues increased $137 million, or 23%, to $732 million for the nine months ended September 30, 2003 from $595 million for the same period of 2002. The increase in competitive supply revenues was primarily due to a $118 million revenue increase at our businesses in North America and a $23 million revenue increase at our businesses in South America. This was partially offset by a $17 million decrease in Europe/Africa. In North America, competitive supply revenues increased $44 million and $23 million due to the start of commercial operations at Granite Ridge and Wolf Hollow, respectively. The remaining revenue increase in North America was due to improved electricity prices and demand in New York. In South America revenues increased $23 million due to increased production at the Argentine businesses. Revenues decreased by $17 million in Europe/Africa due primarily to a $21 million decrease at a retail energy business that has been terminated.
~~Gross Margin~~

Nine Months Ended
September 30, 2003

% of Revenue

Nine Months Ended
September 30, 2002

% of Revenue

%
Change

(in $millions)

(in $millions)

Large Utilities:

North America

$
220

35
%
$
238

38
%
(8
)%
South America

189

14
%
215

16
%
(12
)%
Caribbean*

164

38
%
164

33
%
—
%
Total Large Utilities:

$
573

24
%
$
617

26
%
(7
)%

Growth Distribution:

South America

$
66

21
%
$
(38
)
(19
)%
274
%
Caribbean*

9

2
%
44

11
%
(80
)%
Europe/Africa

21

8
%
23

11
%
(9
)%
Total Growth Distribution

$
96

10
%
$
29

4
%
231
%

Total Regulated Gross Margin

$
669

20
%
$
646

20
%
4
%
*              Includes Venezuela and Colombia
~~Regulated gross margin.~~Regulated gross margin, which represents total revenues reduced by cost of sales, increased ~~$23~~$42 million, or 4%20%, to ~~$669~~$257 million for the ~~nine months ended September 30, 2003~~first quarter of 2004 from ~~$646~~$215 million compared to the same period in ~~2002.~~2003. The increase in regulated gross margin ~~consists of improvements at~~is mainly due to increased revenues, most notably in our ~~growth distribution businesses~~South American businesses. This increase is partially offset by ~~lower large utility margins.~~increased purchased energy costs, fuel costs, and miscellaneous operating costs. Regulated gross margin as a percentage of revenues remained consistent at ~~20% for~~22% in the first ~~nine months~~quarter of ~~2003 and 2002.~~2004 compared to the same period in 2003.

March 31, 2004

March 31, 2003

Change

Three
Months
Ended
Amount

Operating
Gross
Margin %

Three
Months
Ended
Amount

Operating
Gross
Margin %

Three
Months
Ended
Variance

% Change

(in $ millions)

Large Utilities:

North America

$
77

36
%
$
82

38
%
$
(5
)
(6
)%

South America

63

14
%
43

12
%
20

47
%

Caribbean*

54

37
%
40

31
%
14

35
%

Total Large Utilities

$
194

24
%
$
165

24
%
$
29

18
%

Growth Distribution:

South America

$
32

25
%
$
21

24
%
$
11

52
%

Caribbean*

18

21
%
14

16
%
4

29
%

Europe/Africa

14

12
%
16

18
%
(2
)
(13
)%

Asia

(1
)
—
%
(1
)
—
%
—

—
%

Total Growth Distribution

$
63

19
%
$
50

19
%
$
13

26
%
Total Regulated Gross Margin

$
257

22
%
$
215

22
%
$
42

20
%
*              Includes Venezuela

45Large Utilities

Large utilities gross margin ~~decreased $44~~increased $29 million, or 7%18%, to ~~$573~~$194 million for the ~~nine months ended September 30, 2003~~first quarter of 2004 from ~~$617~~$165 million for the ~~same period~~first quarter of 2003. This increase is primarily due to an increase in ~~2002. Gross margin decreased $26 million~~revenues at Eletropaulo and EDC. This increase is partially offset by currency fluctuations of the Brazilian Real and increased purchased energy costs due to increased operating costs, higher pension costs, and unfavorable foreign exchange rates. IPALCO’s gross margin decreased $18 million in 2003 due to increased maintenance costs associated with their NOx compliance construction program and storm damage, increased fuel costs, and increased pension costs. Gross margincontract readjustments at ~~EDC remained virtually unchanged from the prior year.~~Eletropaulo. The large utilities gross margin as a percentage of revenues ~~decreased~~increased to 24% for the first ~~nine months~~quarter of ~~2003 from 26%~~2004 compared to 23% for the first ~~nine months~~quarter of ~~2002. Gross margin ratios decreased in North and South America and remained relatively flat in the Caribbean.~~2003.
Growth Distribution

Growth distribution gross margin increased ~~$67~~$13 million, or 26%, to ~~$96~~$63 million for the ~~nine months ended September 30, 2003~~first quarter of 2004 from ~~$29~~$50 million for the ~~same period~~first quarter of 2003. This increase is comprised of an increase in ~~2002. South America gross margin increased $104 million~~revenues at Sul in
32

Brazil and SONEL in Cameroon. These increases are partially offset by currency fluctuations related primarily ~~due~~ to the ~~2002 provision of $145 million for the~~ Brazilian regulatory decision at Sul in Brazil offset by reductions at Sul caused by lower revenues and the effect of foreign currency devaluation. Europe/Africa gross margin decreased $2 million mainly due to weaker gross margin at SONEL. Caribbean gross margin decreased $35 million mainly due to higherReal, increased fuel costs ~~unfavorable foreign exchange rates,~~in our Europe/Africa businesses and ~~lower revenues at Ede Este.~~higher operating expenditures in the South American businesses. The growth distribution gross margin as a percentage of revenues ~~improved to 10%~~remained constant at 19% for the first ~~nine months~~quarter of ~~2003 from 4% for~~2004 compared to the ~~first nine months of 2002.~~

Nine Months Ended
September 30, 2003

% of Revenue

Nine Months Ended
September 30, 2002

% of
Revenue

%
Change

(in millions)

(in millions)

Contract Generation:

North America

$
298

45
%
$
313

50
%
(5
)%
South America

281

42
%
240

37
%
17
%
Caribbean*

91

26
%
18

16
%
NM

Europe/Africa

97

31
%
88

34
%
10
%
Asia

135

48
%
115

49
%
17
%
Total Contract Generation

$
902

40
%
$
774

41
%
17
%
Competitive Supply:

North America

$
84

20
%
$
59

20
%
42
%
South America

33

42
%
11

20
%
200
%
Caribbean*

21

32
%
23

38
%
(9
)%
Europe/Africa

6

6
%
12

10
%
(50
)%
Asia

17

25
%
12

19
%
42
%
Total Competitive Supply

$
161

22
%
$
117

20
%
38
%

Total Non-Regulated Gross Margin

$
1,063

35
%
$
891

36
%
19
%
*                                         ~~Includes Venezuela and Colombia~~
~~NM - - Not Meaningful~~same period in 2003.

~~Non-regulated gross margin.~~Non-Regulated Gross Margin
Non-regulated gross margin increased ~~$172~~$64 million, or ~~19%~~18%, to ~~$1,063~~$423 million for the ~~nine months ended September 30, 2003~~first quarter of 2004 from ~~$891~~$359 million during the same period in ~~2002. $128 million of this~~2003. The overall increase ~~was realized at~~in non-regulated gross margin is mainly due to increased revenues in our contract generation businesses. These increases are partially offset by increased energy purchases in some Brazilian businesses and in the Dominican Republic. Fuel expenditures and fixed operating costs also increased due to increased demand. Non-regulated gross margin as a percentage of revenues ~~decreased to 35%~~remained constant at 38% for the ~~nine months ended September 30, 2003 compared to 36% for the same period in 2002.~~first quarter of 2004 and 2003.

March 31, 2004

March 31, 2003

Change

Three
Months
Ended
Amount

Operating
Gross
Margin %

Three
Months
Ended
Amount

Operating
Gross
Margin %

Three
Months
Ended
Variance

% Change

(in $ millions)

Contract Generation:

North America

$
96

44
%
$
90

44
%
$
6

7
%

South America

120

45
%
89

44
%
31

35
%

Caribbean*

34

26
%
30

27
%
4

13
%

Europe/Africa

52

42
%
48

43
%
4

8
%

Asia

57

44
%
33

41
%
24

73
%

Total Contract Generation

$
359

41
%
$
290

41
%
$
69

24
%

Competitive Supply:

North America

$
28

25
%
$
40

33
%
$
(12
)
(30
)%

South America

10

32
%
10

42
%
—

—
%

Caribbean*

10

33
%
8

42
%
2

25
%

Europe/Africa

3

9
%
2

5
%
1

50
%

Asia

13

36
%
9

33
%
4

44
%

Total Competitive Supply

$
64

26
%
$
69

30
%
$
(5
)
(7
)%
Total Non-Regulated Gross Margin

$
423

38
%
$
359

38
%
$
64

18
%
*              Includes Venezuela
33

Contract Generation

Contract generation gross margin increased ~~$128~~$69 million, or ~~17%~~24%, to ~~$902~~$359 million for the ~~nine months ended September 30,~~first quarter of 2003 from ~~$774~~$290 million for the ~~same period~~first quarter of 2003. This increase is primarily due to an increase in ~~2002.~~revenues in our South American and Asian businesses. These increases are partially offset by increased purchased electricity in the Brazilian businesses. The Dominican Republic also had increased purchased electricity costs due to an increase in spot market purchases. Fuel costs also increased due to greenfield development projects becoming operational subsequent to March 31, 2003. New greenfield development projects include Andres in the Caribbean and Kelanitissa in Asia. The contract generation gross margin as a percentage of revenues ~~decreased slightly to 40% for the first nine months of 2003 from~~remained consistent at 41% for the first ~~nine months~~quarter of ~~2002. Gross margin increased in all regions except North America. South America gross margin increased $41 million due to improvements at Uruguaiana~~2004 and Tiete in Brazil. Caribbean gross margin increased $73 million primarily due to the commencement of commercial operations at Puerto Rico subsequent to September 30, 2002. Europe/Africa gross margin increased $9 million due mainly to increased production at Ebute. Asia gross margin increased $20 million mainly due to positive gross margins from greenfield projects at Barka and Ras Laffan partially offset by lower margins at our Chigen business. North America gross margin decreased $15 million mainly due to a reduction in contracted capacity payments at Shady Point and lower margins at Beaver Valley, Ironwood and Southland.2003.
Competitive Supply

Competitive supply gross margin ~~increased $44~~decreased $5 million, or ~~38%~~7%, to ~~$161~~$64 million for the ~~nine months ended September 30, 2003~~first quarter of 2004 from ~~$117~~$69 million for the ~~same period~~first quarter of 2003. This decrease is primarily due to increased fuel costs across all geographic regions. Purchased energy costs increased in ~~2002. Competitive~~Panama due to an increase in contractual commitments. Depreciation also increased in Panama because new assets were placed into service. Currency fluctuations in the Asian and Europe/African businesses also contributed to the overall decrease in gross margin. These increases are partially offset by an increase in revenues in the South American, Caribbean and Asia regions. The competitive supply gross margin as a percentage of revenues ~~increased~~decreased 4% to ~~22%~~26% for the first ~~nine months~~quarter of ~~2003~~2004 from ~~20%~~30% for the first ~~nine months~~quarter of 2002. Gross margin increased in North America, South America, and Asia, and decreased in the Caribbean and Europe/Africa. North America gross margin increased $25 million due to improved electricity prices and2003.

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~~demand in New York offset by lower gross margins at Deepwater~~Corporate and the Granite Ridge greenfield project. Asia gross margin increased $5 million due to operational improvements at Altai and Maikubin. South America gross margin increased $22 million mainly due to operational improvements at our Argentine businesses. Europe/Africa gross margin decreased $6 million mainly due to weaker margins at Borsod.business development expenses

~~Selling, general~~Corporate and ~~administrative expenses.~~ ~~Selling, general and administrative expenses~~business development office expense increased ~~$33~~$19 million, or 66%, to ~~$97~~$48 million for the ~~nine months ended September 30, 2003~~first quarter of 2004 compared to $29 million for the same period in ~~2002. Selling, general~~2003. Corporate and administrative costs as a percentage of revenues were 2% and 1% for the first nine months of 2003 and 2002, respectively. The increase was primarily caused by the Company’s shift to a more centralized organizational structure.
~~Interest expense.~~   ~~Interest expense increased $225 million, or 17%, to $1,535 million for the nine months ended September 30, 2003 compared to the same period in 2002. Interest~~business development office expense as a percentage of ~~revenue increased from 23% during~~total revenues remained approximately 2% in 2004 and in 2003. The increase in dollar amounts is a result of additional personnel, expensing of stock options and other long-term incentive compensation and infrastructure associated with the implementation of several corporate initiatives including cost associated with our property and casualty insurance captive.
Interest expense
Interest expense decreased $7 million, or 1%, to $493 million for the first ~~nine months~~quarter of ~~2002~~2004 compared to ~~24% during~~ the same period in 2003. Interest expense ~~increased~~as a percentage of revenues decreased from 26% during the first quarter of 2003 to 22% during the same period in 2004. Interest expense decreased primarily due to a reduction of debt associated with the Brazil debt restructuring completed at the end of 2003, which is almost entirely offset by derivative losses and interest expense atfrom new businesses, penalties incurred at businesses in default, and additional corporate interest costs arising from the senior debt issued within the past twelve months at higher interest rates to refinance prior obligations at lower interest rates.financing.

Interest ~~income.~~income
Interest income ~~increased $11 million to $215~~remained constant at $69 million for the ~~nine months ended September 30, 2003~~first quarter of 2004 compared to the same period in ~~2002.~~2003. Interest income as a percentage of ~~revenue~~revenues decreased to 3% for the first ~~nine months~~quarter of ~~2003~~2004 from 4% for the first ~~nine months~~quarter of ~~2002.~~2003.

Other ~~expense.~~income
Other ~~expense increased $44~~income decreased $9 million to ~~$79~~$11 million for the ~~nine months ended September 30, 2003~~first quarter of 2004 compared to ~~$35~~the same period in 2003. The decrease is a result of a gain on the early extinguishment of debt recorded in the first quarter of 2003 that is partially offset by a gain resulting from a land sale in the first quarter of 2004.
Other expense
Other expense decreased $2 million to $25 million for the first quarter of 2004 compared to $27 million for the same period in ~~2002.~~2003. Other expense primarily consists of losses on the sale of assets, marked-to-market losses on commodity derivatives ~~loss on extinguishment of liabilities, written off debt financing costs,~~ and ~~costs~~losses associated with the ~~settlement~~early extinguishment of ~~litigation. See Note 7 to the consolidated financial statements for a summary of other expense.~~ liabilities.

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~~Other income.~~
~~Other income increased $50 million to $162~~
Loss on sale of investments
Loss on sale of investments was $1 million for the ~~nine months ended September 30,~~first quarter of 2004. This loss was a result of an adjustment to an estimate related to the December 2003 sale of approximately 39% of AES’s interest in AES Oasis Limited (“AES Oasis”).
Foreign currency transaction gains (losses) on net debt
The Company recognized foreign currency transaction losses of $(8) million during the first quarter of 2004 compared to gains from foreign currency transactions of $82 million in the first quarter of 2003. This change was the primarily the result of changes associated with the Brazilian Real. The average exchange rate for the Brazilian Real remained constant compared to the December 2003 year-end rate, whereas in the first quarter of 2003 the rate appreciated approximately 5.9% compared to the December 2002 year-end rate. The result is a marginal loss in the first quarter of 2004 compared to a significant gain in the same quarter of 2003.
Equity in earnings of affiliates
Equity in pre-tax earnings of affiliates decreased $8 million, or 33%, to $16 million compared to the same period in 2002. Other income primarily consists of gains on the extinguishment of liabilities, settlement of litigation, marked-to-market gains on commodity derivatives, and gains on the sale of assets. See Note 7 to the consolidated financial statements for a summary of other income.
~~Loss on sale or write-down of investments and asset impairment expense.~~ ~~Loss on sale or write-down of investments and asset impairment expense decreased $177 million, or 63%, to $106 million for the first nine months of~~ 2003. This amount includes the write-off of $22 million of capitalized costs associated with El Faro, a development project in Honduras that was terminated in the second quarter of 2003, and the write-off of $75 million of capitalized costs associated with the Bujagali project that was terminated in the third quarter of 2003.
In the first quarter of 2002, EDC sold an available-for-sale security resulting in proceeds of $92 million. The realized loss on the sale was $57 million. Approximately $48 million of the loss related to recognition of previously unrealized losses which had been recorded in other comprehensive income. In the second quarter of 2002, the Company recorded an impairment charge of $45 million on an equity method investment in a telecommunications company in Latin America and a loss on the sale of an equity method investment in a telecommunications company in Latin America of approximately $14 million.
~~Foreign currency transaction gains (losses), net.~~ The Company recognized foreign currency transaction gains of $114 million during the nine months ended September 30, 2003 compared to losses from foreign currency transactions of $455 million in the same period of 2002. Foreign currency transaction gains increased primarily due to a 16% appreciation in the Argentina Peso from 3.32 at December 31, 2002 to 2.87 at September 30, 2003, which resulted in $47 million of foreign currency transaction gains for the nine months ended September 30, 2003. Additionally, a 21% appreciation occurred in the Brazilian real during the first nine months of 2003. The Brazilian real improved from 3.53 at December 31, 2002 to 2.92 at September 30, 2003. As a result of the appreciation, the Company recorded Brazilian foreign currency gains of $130 million for the nine months ended September 30, 2003. These gains were partially offset by $9 million of foreign transaction losses recorded at EDC for the nine months ended September 30, 2003 due to a devaluation of the U.S. dollar compared to the Euro which is the denomination of certain of EDC’s debts, securities transactions losses to serve EDC’s dollar-denominated debt, and mark-to-market losses on foreign currency forward and swap contracts. This impact was partially offset by gains from a 12% devaluation of the Venezuelan bolivar from 1,403 at December 31, 2002 to 1,600 at September 30, 2003. Additionally, during the nine months ended September 30, 2003, Ede Este, a growth distribution business located in the Dominican Republic, experienced foreign currency transaction losses of $40 million and the Company’s generation businesses in Pakistan experienced $11 million of foreign currency transaction losses.
~~Equity in pre-tax earnings of affiliates.~~ ~~Equity in pre-tax earnings of affiliates increased $22 million, or 63%, to $57 million during the~~
47

~~nine months ended September 30, 2003 compared to the same period in 2002.~~ Equity in earnings of affiliates ~~increased~~decreased slightly in ~~2003~~2004 primarily due to ~~the net effect of an $11 million increase~~a decrease in earnings at Kingston, our ~~investment~~equity affiliate in Canada, which arose as a result of damages in connection with a fire at the Chigen affiliates plus $104 million of foreign currency transaction losses included in the 2002 amount, offset by $93 million of 2002 earnings at unconsolidated South American large utilities that have either been consolidated or disposed of in 2003,.plant.

Income ~~tax expense (benefit).~~taxes
Income taxes ~~on continuing operations~~ (including income taxes on equity in earnings) changed to an expense of $128 million for the nine months ended September 30, 2003 from a benefit of $37 million for the nine months ended September 30, 2002. The effective tax rate changed from a tax benefit at a 15% effective rate in 2002 to a tax expense at a 34% effective tax rate in 2003.
~~Minority interest in net income (losses) of subsidiaries.~~ The Company recorded $88 million of minority interest expense during the nine months ended September 30, 2003 compared to minority interest income of $11 million during the same period of 2002. Minority interest expense was higher in all segments during 2003 than in 2002.
~~Large utilities minority interest expense~~ increased $6 million to expense of $12 million in the nine months ended September 30, 2003 from expense of $6 million for the same period of 2002. Increased minority interest expense occurred in South America and was offset by reduced expense in the Caribbean.
Growth distribution minority interest decreased from a benefit of $16 million for the nine months ended September 30, 2002 to a benefit of $1 million for the same period of 2003. The minority interest benefit at our businesses in South America decreased $24 million and was partially offset by increased minority interest benefit at our Caribbean businesses in 2003.
~~Contract generation minority interest expense increased $22~~$13 million to $64 million in the nine months ended September 30, 2003 compared to expense of $42 million in the nine months ended September 30, 2002. The change is primarily due to the sharing of increased earnings by the minority partners of Tiete in Brazil and sharing of earnings with our minority partners in the Barka and Ras Laffan greenfield projects that were placed into service subsequent to September 30, 2002.
Competitive supply minority interest changed by $55 million to expense of $12 million in the nine months ended September 30, 2003 compared to a benefit of $43 million in the same period of 2002. The change in competitive supply minority interest is primarily due to sharing of losses duringfor the first ~~nine months~~quarter of ~~2002 at Parana.~~
~~Income (loss) from continuing operations.~~ ~~Income (loss) from continuing operations changed from a loss of $211 million for the nine months ended September 30, 2002~~2004 compared to ~~income of $247 for~~ the same period in 2003. The ~~change~~company’s effective tax rate was primarily due to improved gross margin, favorable foreign exchange effects, and lower asset write-down and impairment charges during the first nine months of 2003. These changes were slightly offset by greater interest expense, greater income tax expense, and increased minority interest expense.
~~Loss from operations of discontinued businesses.~~ ~~During the nine months ended September 30, 2003 and 2002, the Company recorded losses from operations of discontinued businesses of $204 million and $186 million, net of tax, respectively.~~
~~In July 2003, AES reached an agreement to sell 100% of its ownership interest in AES Mtkvari, AES Khrami and AES Telasi~~32% for gross proceeds of $23 million. Accordingly, these businesses were classified as discontinued in the second quarter of 2003. As a result of the transaction, the Company recorded a pre-tax impairment charge of $204 million during the second quarter of 2003 to reduce the carrying value of the assets to their estimated fair value in accordance with SFAS No. 144. Completion of the sales transaction is subject to certain conditions, including government and lender approvals.
~~During the quarter ended March 31, 2003, the Company reached an agreement to sell~~ ~~100% of its ownership interest in both AES Haripur Private Ltd. and AES Meghnaghat Ltd., which are generation businesses in Bangladesh. Additionally, during~~ the first quarter of ~~2003, the Companycommitted to a plan to sell its ownership in AES Barry. Accordingly, these businesses were classified as discontinued in~~2004 and 24% for the first quarter of 2003. ~~During~~The effective tax rate increased as a result of increased dividends from certain businesses outside the ~~quarter ended March 31, 2002, the Company wrote-off its investment in Fifoots after the plant was placed in administrative receivership.~~United States.

~~Accounting change.~~Change in accounting principle ~~Effective~~
On January 1, 2003, ~~the Company~~we adopted ~~Statement of Financial Accounting Standard (SFAS)~~SFAS No. 143, “Accounting for Asset Retirement ~~Obligations.” SFAS No. 143~~Obligations” which requires ~~entities~~companies to record the fair value of a legal liability for an asset retirement obligation in the period in which it is incurred. ~~When a new liability is recorded beginning in 2003, the entity will capitalize the costs~~The items that are part of the ~~liability by increasing the carrying amount~~scope of ~~the related long-lived asset. The liability is accreted to its present value each period,~~SFAS 143 for our business primarily include active ash landfills, water treatment basins and the ~~capitalized cost is depreciated over the useful life~~removal or dismantlement of ~~the related asset. Upon settlement of the liability, an entity settles the obligation for its recorded amount or incurs a gain or loss upon settlement.~~certain plant and equipment. The adoption of SFAS No. 143 resulted in a cumulative reduction to income of $2 million, net of income tax ~~effects, during the nine months ended September 30, 2003.~~
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Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” which establishes accounting and reporting standards for goodwill and other intangible assets. The adoption of SFAS No. 142 resulted in a cumulative reduction to income of $473 million, net of income tax effects, during the nine months ended September 30, 2002.
On April 1, 2002, the Company adopted Derivative Implementation Group (“DIG”) Issue C-15 which established specific guidelines for certain contracts to be considered normal purchases and normal sales contracts. As a result of this adoption, the Company had two contracts which no longer qualified as normal purchases and normal sales contract and were required to be treated as derivative instruments. The adoption of DIG Issue C-15, effective April 1, 2002, resulted in a cumulative increase to income of $127 million, net of income tax effects.

~~Net income (loss).~~ The Company recorded net income of $41 million and a net loss of $743 million for the nine months ended September 30, 2003 and 2002, respectively. The improvement in 2003 was due to higher gross margin, favorable foreign currency exchange effects, lower asset write-down and impairment charges, and the cumulative effect of the accounting change in 2002. This effect was offset by higher interest expense, greater income tax expense and increased minority interest expense in 2003.
~~FINANCIAL POSITION, CASH FLOWS~~CAPITAL RESOURCES AND ~~FOREIGN CURRENCY EXCHANGE RATES~~LIQUIDITY

~~Non-recourse project financing~~Overview

~~General~~
~~AES is~~We are a holding company that conducts all of ~~its~~our operations through subsidiaries. ~~AES has,~~We have, to the extent ~~practicable,~~achievable, utilized non-recourse debt to fund a significant portion of the capital expenditures and investments required to construct and acquire ~~its~~our electric power plants, distribution companies and related assets. ~~Non-recourse borrowings are substantially~~This type of financing is non-recourse to other subsidiaries and affiliates and to ~~AES as the~~us (as a parent ~~company,~~company), and ~~are~~is generally secured by the capital stock, physical assets, contracts and cash flow of the related subsidiary or affiliate. At ~~September 30, 2003, AES~~March 31, 2004, we had ~~$5.3~~$5.6 billion of recourse debt and ~~$14.3~~$13.2 billion of non-recourse debt outstanding.
The Company intends to continue to seek, where possible, non-recourse debt financing in connection with the assets or businesses that the Company or its affiliates may develop, construct or acquire. However, depending on market conditions and the unique characteristics of individual businesses, non-recourse debt financing may not be available or available on economically attractive terms. If the Company decides not to provide any additional funding or credit support, the inability of any of its subsidiaries that are under construction or that have near-term debt payment obligations to obtain non-recourse project financing may result in such subsidiary’s insolvency and the loss of the Company’s investment in such subsidiary. Additionally, the loss of a significant customer at any of the Company’s subsidiaries may result in the need to restructure the non-recourse project financing at that subsidiary, and the inability to successfully complete a restructuring of the non-recourse project financing may result in a loss of the Company’s investment in such subsidiary.

In addition to the non-recourse debt, if available, ~~AES~~we, as the parent company, ~~provides~~provide a portion, or in certain instances all, of the remaining long-term financing or credit required to fund development, construction or acquisition. These investments have generally taken the form of equity investments or loans, which are subordinated to the project’s non-recourse loans. ~~The~~We generally obtain the funds for these investments ~~have been provided by~~from our cash flows from operations ~~and by~~and/or the proceeds from our issuances of debt, common stock and other ~~securities issued by the Company.~~
35

securities. Similarly, in certain of ~~its~~our businesses, ~~the Company~~we may provide financial guarantees or other credit support for the benefit of ~~counterparties~~counter-parties who have entered into contracts for the purchase or sale of electricity with ~~the Company’s~~our subsidiaries. In such circumstances, ~~were~~if a subsidiary ~~to default~~defaults on aits payment or supply obligation, ~~the Company would~~we will be responsible for ~~its~~the subsidiary’s obligations up to the amount provided for in the relevant guarantee or other credit support.

We intend to continue to seek where possible non-recourse debt financing in connection with the assets or businesses that our affiliates or we may develop, construct or acquire; however, depending on market conditions and the unique characteristics of individual businesses, non-recourse debt may not be available or; may not be available on terms attractive to the Company. If we decide not to provide any additional funding or credit support to a subsidiary that is under construction or has near-term debt payment obligations and that subsidiary is unable to obtain additional non-recourse debt, such subsidiary may become insolvent and we may lose our investment in such subsidiary. Additionally, if any of our subsidiaries lose a significant customer, the subsidiary may need to restructure the non-recourse debt financing. If such subsidiary is unable to successfully complete a restructuring of the non-recourse debt, we may lose our investment in such subsidiary.
As a result of ~~the trading prices of AES’s equity and debt securities, counterparties~~our below-investment-grade rating, counter-parties may ~~not~~ be ~~willing~~unwilling to accept our general unsecured commitments ~~by AES~~ to provide credit support. Accordingly, with respect to both new and existing commitments, ~~AES~~we may be required to provide some other form of assurance, such as a letter of credit, to backstop or replace ~~any AES~~our credit support. ~~AES~~We may not be able to provide adequate assurances to such ~~counterparties.~~counter-parties. In addition, to the extent ~~AES is~~we are required and able to provide letters of credit or other collateral to such ~~counterparties, it~~counter-parties, this will ~~limit~~reduce the amount of credit available to ~~AES~~us to meet ~~its~~our other liquidity needs.
At ~~September 30, 2003, the Company~~March 31, 2004, we had provided outstanding financial and performance related guarantees or other credit support commitments to or for the benefit of ~~its~~our subsidiaries, which were limited by the terms of the agreements, toin an aggregate of approximately ~~$557~~$525 million (excluding those collateralized by ~~letter-of-credit~~letters of credit and other obligations discussed below). ~~The Company is~~We also are obligated under other commitments pursuant to which our obligations are limited to ~~amounts,~~the amount or ~~percentages~~a specified percentage of ~~amounts, received by AES as~~the amount of distributions that we receive from ~~its project~~our projects subsidiaries. ~~These amounts aggregated $25~~This includes commitments of $38 million ~~as of September 30, 2003. In addition, the Company has commitments~~ to fund ~~its~~our equity in projects currently under development or in construction. ~~At September 30, 2003, such commitments to invest amounted to approximately $21 million (excluding those collateralized by letter-of-credit obligations).~~
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At ~~September 30, 2003, the Company~~March 31, 2004, we had ~~$96~~$98 million in letters of credit outstanding, which operate to guarantee performance relating to certain project development activities and subsidiary operations. ~~The Company pays a letter-of-credit fee~~Of these letters of credit, $79 million were provided under our revolver. We pay letter of credit fees ranging from ~~0.50%~~0.5% to ~~5.00%~~5.0% per annum on the outstanding amounts. In addition, ~~the Company~~we had $4 million in surety bonds outstanding at ~~September 30, 2003.~~March 31, 2004.

~~Project level defaults~~Financial Position and Cash Flows
~~While~~At March 31, 2004, net change in cash and cash equivalents was a cash outflow of $617 million, a decline of $1 billion from the ~~lenders under AES’s non-recourse project financings generally do not have direct recourse~~quarter ended March 31, 2003. A majority of this decline occurred as a result of increased restricted cash balance requirements in 2004 and decreased proceeds from the sale of assets versus the prior year.
Net cash provided by operating activities declined by $44 million from $446 million in first quarter 2003 to $402 million in first quarter 2004. This decrease was driven largely by lower net income. The increase in other non-cash adjustments of $280 million was due to increased foreign currency transactions, decreased loss on disposal and impairment of discontinued businesses, increased minority interest expense, increased provision for taxes, and pension costs. This was offset by a decrease of $292 million in the change in operating assets and liabilities resulting from decreased accrued interest, decreased accrued and other liabilities, and increased accounts receivable. Included in net cash provided by operating activities in the quarter ended March 31, 2003 is approximately $120 million of cash inflows for businesses sold prior to first quarter 2004.
Net cash used in investing activities increased by $802 million from $186 million positive cash in first quarter 2003 to $616 million use of cash in first quarter 2004. The decrease of cash flows is primarily due to $350 million increase in restricted cash primarily at Gener for the repurchase and cancellation of bonds, a decrease in the net proceeds from asset sales of $558 million, $522 million of which is the result of the sale of Cilcorp, Ecogen, and Kelvin in the prior year. This is offset by a decline in property additions of $75 million due to the ~~parent, defaults thereunder can still have important consequences for AES’s results~~completion of development projects in our Oasis operations, ~~and liquidity, including, without limitation:~~which resulted in $67 million cash outflow in the prior year.

•                                          ~~Reducing AES’s~~Net cash ~~flows since the project subsidiary may be prohibited~~used in financing activities increased by $162 million from ~~distributing cash to AES during the pendancy of any default~~
•                                          ~~Triggering any AES obligations to make payments under any financial guarantee, letter of credit or other credit support AES has provided to or on behalf of such subsidiary~~
•                                          ~~Causing AES to record a loss~~$225 million in ~~the event the lender forecloses on the assets~~
•                                          Triggering defaults in the parent’s outstanding debt. For example, the parent’s senior secured credit agreement and outstanding senior secured notes, senior notes, senior subordinated notes, and junior subordinated notes include events of default for certain bankruptcy related events involving material subsidiaries. In addition, the parent’s senior secured credit agreement includes events of default related to payment defaults and accelerations of outstanding debt of material subsidiaries.
~~As reported in our Current Report on Form 8-K filed June 13, 2003, Eletropaulo in Brazil and Edelap, Eden/Edes, Parana and TermoAndes, all in Argentina, are still in default. In addition, during~~ the first quarter of 2003 ~~CEMIG and Sul in Brazil each went into default on its outstanding debt. Furthermore, as a result of delays encountered in completing construction of the project, AES Wolf Hollow failed~~ to convert its construction loan to a term loan prior to the construction loan’s maturity date of June 20, 2003. AES Wolf Hollow believes that these delays have been caused by the failure of third parties to perform their contractual obligations, and it is pursuing its legal claim against such third parties. The failure to convert the loan has resulted in a default under AES Wolf Hollow’s credit facility, and discussions with the project lender relating to its potential exercise of remedies and/or potential restructurings are ongoing. There can be no assurances that the project lender will not seek to exercise its remedies in connection with the continuing default under AES Wolf Hollow’s credit facilities. The total debt classified as current$387 million in the ~~accompanying consolidated balance sheets related to such defaults was $2.2 billion at September 30, 2003.~~first quarter of 2004. The decrease of cash flows is due debt repayments, net of issuances, of $116 million and increase payments for deferred financing costs of $25 million.

On September 8, 2003, AES entered into a memorandum of understanding with the National Development Bank of Brazil (“BNDES”) to restructure the outstanding loans owed to BNDES by several of AES' Brazilian subsidiaries. The restructuring will include the creation of a new company that will hold AES' interests in Eletropaulo, Uruguaiana and Tiete. Sul may be contributed upon the successful completion of its financial restructuring. AES will own 50.1%, and BNDES will own 49.9%, of the new company. Under the terms of the agreement, 50% of the currently outstanding BNDES debt of $1.2 billion will be converted into 49.9% of the new company. The remaining outstanding balance of $515 million (which remains non-recourse to AES) will be payable over a period of 10 to 12 years. AES and its subsidiaries will also contribute $85 million as part of the restructuring, of which $60 million will be contributed at closing and $25 million will be contributed one year after closing.
~~Closing of the transaction is subject to the negotiation and execution of definitive documentation, certain lender and regulatory approvals and valuation diligence to be conducted by BNDES.~~
Sul and AES Cayman Guaiba, a subsidiary of the Company that owns the Company’s interest in Sul, are facing near-term debt payment obligations that must be extended, restructured, refinanced or paid. Sul had outstanding debentures of approximately $77 million (including accrued interest) at the September 30, 2003 exchange rate that were restructured on December 1, 2002. The restructured debentures have a partial interest payment due in December 2003 and principal payments due in 12 equal monthly installments commencing on December 1, 2003. Additionally, Sul has an outstanding working capital loan of approximately $10 million (including accrued interest) which is to be repaid in 12 monthly installments commencing on January 30, 2004. Furthermore, on January 20, 2003, Sul and AES Cayman Guaiba signed a letter agreement with the agent for the banks under the $300 million AES Cayman Guaiba syndicated loan for the restructuring of the loan. A $30 million principal payment due on January 24, 2003 under the syndicated loan was waived by the lenders through April 24, 2003 and has not been paid. While the lenders have not agreed to extend any additional waivers, they have not exercised their rights under the $50 million AES parent guarantee. There can be no assurance, however, that an additional waiver or a restructuring of this loan will be completed.
None of the AES subsidiaries in default on their non-recourse project financings at September 30, 2003 are material subsidiaries as defined in the parent’s indebtedness agreements, and therefore, none of these defaults can cause a cross-default or cross-acceleration under the parent’s revolving credit agreement or other outstanding indebtedness referred to in our Current Report on Form 8-K dated June 13, 2003, nor are they expected to otherwise have a material adverse effect on the Company’s results of operations or financial condition.
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~~Consolidated cash flow~~Parent Company Liquidity
At September 30, 2003, cash and cash equivalents totaled $1.5 billion compared to $797 million at December 31, 2002. The $680 million increase resulted from the $1.1 billion provided by operating activities offset by the $426 million used in investing activities and the $74 million used in financing activities. The net cash used in financing activities was primarily the net result of $335 million received from the sale of common stock in June 2003 plus approximately $4.1 billion received from the issuance of non-recourse debt and other securities offset by outflows of approximately $4.2 billion for repayment of non-recourse debt and other coupon bearing securities, and outflows of $228 million for repayments of revolving credit facilities during the nine months ended September 30, 2003. At September 30, 2003, the Company had a consolidated net working capital deficit of ($2.6) billion compared to ($2.2) billion at December 31, 2002. Included in net working capital at September 30, 2003 is approximately $4.3 billion from the current portion of long-term debt. The Company expects to refinance a significant amount of the current portion of long-term non-recourse debt. There can be no guarantee that these refinancings can be completed or will have terms as favorable as those currently in existence. There are some subsidiaries that issue short-term debt and commercial paper in the normal course of business and continually refinance these obligations. The decrease in working capital is mainly due to the increased current liabilities of discontinued operations and businesses held for sale.
~~Parent company liquidity~~
Because of the non-recourse nature of most of ~~AES’s~~our indebtedness, ~~AES believes~~we believe that unconsolidated parent company liquidity is an important measure of ~~the liquidity position of AES and its consolidated subsidiaries as presented on a consolidated basis.~~
~~The parent company’s~~liquidity. Our principal sources of liquidity at the parent company level are:

•      ~~Dividends~~dividends and other distributions from ~~its~~our subsidiaries, including ~~refinancing~~project financing proceeds and returns of capital,

•      ~~Proceeds~~proceeds from debt and equity financings at the parent company level, including borrowings under ~~its~~our revolving credit facility,
•                                          ~~Proceeds from asset sales~~
•                                          ~~Consulting and management fees~~
•                                          ~~Tax sharing payments,~~ and

•      ~~Interest and other distributions paid during the period with respect to cash and other temporary cash investments less parent operating expenses~~proceeds from asset sales.

~~The~~Our cash requirements at the parent ~~company’s cash requirements~~company level through the end of ~~2003~~2004 are primarily to fund:

•      ~~Interest~~interest and preferred dividends,

•      ~~Principal~~principal repayments of debt,

•      ~~Construction~~construction commitments,

•      ~~Other~~other equity commitments,

•      ~~Compliance with environmental laws~~
•                                          ~~Taxes,~~taxes, and

•      ~~Parent~~parent company overhead, development costs and taxes.
During the quarter ended March 31, 2004, we continued to implement numerous actions designed to maintain or increase parent liquidity, lengthen parent debt maturities, and reduce parent debt and other contractual obligations, both contingent and non-contingent. These actions are consistent with our strategic goals of improving the credit profile of both the parent and the consolidated company in order to reduce our financial risk and improve our credit rating by the major rating agencies.

The ~~ability~~primary actions we undertook during the quarter ended March 31, 2004 to achieve these goals included: (i) increasing the committed amount of our revolving credit facility, (ii) refinancing parent company debt to mature at later maturity dates, and (iii) redeeming parent debt and other contractual obligations. Also, the resolution of a contingent payment associated with our prior sale of Mountainview was favorably resolved.
On February 10, 2004, we completed an offering of $500 million of unsecured senior notes. We used the net proceeds of the offering to repay $500 million of the term loan under our senior secured credit facilities that mature on July 31, 2007 (subject to a possible extension to April 30, 2008 if certain conditions are met). The unsecured notes mature on March 1, 2014 and are callable at the Company’s ~~project subsidiaries~~option at any time at a redemption price equal to ~~declare~~100% of the principal amount of the notes plus a “make-whole” premium. The notes were issued at a price of 98.288% and pay interest semi-annually at an annual coupon rate of 7.75%.
On March 17, 2004, we increased the size of our secured revolving credit facility from $250 million to $450 million through an expanded group of global financial institutions. We also negotiated amendments to our secured bank credit agreement, which includes the revolving credit facility and a $200 million secured term loan, to add financial flexibility to support our financial strategy. Consistent with the Company’s improving credit statistics, there were no changes in the credit agreement’s pricing, financial covenants or maturity date. The amended credit facility and term loan expire in July 2007 (subject to a possible extension to April 30, 2008 if certain conditions are met).
We redeemed parent debt (net of refinancings) of approximately $350 million during the quarter ended March 31, 2004. These redemptions were comprised of $300 million of cash ~~dividends~~redemptions (both mandatory and optional) and also $50 million of exchanges of debt securities into common stock of the parent. In the past we have bought back debt or exchanged debt for equity and we may do so in the future if beneficial opportunities arise.
In March 2004, we received an additional $20 million contingent payment in relation to the March 2003 asset sale of our equity interests in Mountainview Power Company ~~is subject to certain limitations in the project loans, governmental provisions~~ and ~~other agreements entered into by such project subsidiaries.~~Mountainview Power Company LLC.

5137

~~In addition, certain~~On April 14, 2004 the Company called for redemption $3,084,000 aggregate principal amount of its outstanding 10% senior secured notes due 2005. The notes were redeemed on a pro rata basis on May 14, 2004 at a redemption price equal to 100% of the ~~Company’s regulatory subsidiaries are subject~~principal amount thereof to ~~rules~~be redeemed plus accrued and ~~regulations that could possibly result~~unpaid interest to the redemption date. The redemption was made out of excess asset sale proceeds and reflects the portion of asset sale proceeds allocable to the notes from an additional $20 million contingent payment received by AES in ~~a restriction on their ability~~relation to ~~pay dividends. For example, on February 12,~~its March 2003 ~~the Indiana Utility Regulatory Commission (IURC) issued an Order in connection with a petition filed by Indianapolis Power & Light Company (“IPL”), the principal subsidiary of IPALCO, for approval~~sale of its financing program, including the issuance of additional long-term debt. The Order approved the requested financing but set forth a process whereby IPL must file a report with the IURC, prior to declaring or paying a dividend, that sets forth (1) the amount of any proposed dividend, (2) the amount of dividends distributed during the prior twelve months, (3) an income statement for the same twelve-month period, (4) the most recent balance sheet,equity interests in Mountainview Power Company and (5) IPL’s capitalization as of the close of the preceding month, as well as a pro forma capitalization giving effect to the proposed dividend, with sufficient detail to indicate the amount of unappropriated retained earnings. If within twenty (20) calendar days the IURC does not initiate a proceeding to further explore the implications of the proposed dividend, the proposed dividend will be deemed approved. The Order stated that such process should continue in effect during the term of the financing authority, which expires December 31, 2006. On February 28, 2003, IPL filed a petition for reconsideration, or in the alternative, for rehearing with the IURC. This petition seeks clarification of certain provisions of the Order. In addition, the petition requests that the IURC establish objective criteria in connection with the reporting process related to IPL’s long term debt capitalization ratio. On March 14, 2003 IPL filed a Notice of Appeal of the IURC Order, as amended, in the Indiana Court of Appeals. On April 16, 2003, the IURC issued its Order in response to IPL’s petition for reconsideration. The IURC declined to provide objective criteria relating to the dividend reporting process, and did not set a definitive time frame within which an investigation of a proposed dividend would be concluded. The IURC did make certain requested clarifications and corrections with regard to the Order, including the following: (1) the dividend reporting process applies only to dividends on IPL’s common stock, not on its preferred stock; (2) a confidentiality process is established to maintain confidentiality of information filed under the dividend reporting process until such information has been publicly released and is no longer confidential; (3) dividends are not to be paid until after the twenty calendar days have passed, or the Commission approves the dividend after initiating a proceeding to explore the implications of a proposed dividend; and (4) certain technical corrections. IPL has filed three reports with the IURC under the dividend reporting process. The IURC did not initiate any proceeding in response to the three reports and they were deemed approved after twenty days had elapsed. TheMountainview Power Company ~~continues to believe that IPL will not be prevented from paying future dividends in the ordinary course of prudent business operations.~~
At September 30, 2003, parent and qualified holding company liquidity was $735 million. Of this amount, cash at the parent company was $528 million, availability under the revolving credit facility was $172 million and cash at qualified holding companies was $35 million. The cash held at qualifying holding companies represents cash sent to subsidiaries of the Company domiciled outside of the U.S. Such subsidiaries had no contractual restrictions on their ability to send cash to AES. AES believes that parent and qualified holding company liquidity is an important measure of liquidity for the Company because of the non-recourse nature of most of the Company’s indebtedness. ~~Letters of credit outstanding at September 30, 2003 under the $250 million senior secured revolving credit facility amounted to~~ ~~$77 million. Letters of credit outstanding outside the $250 million senior secured revolving credit facility amounted to $19 million.~~LLC.

While ~~AES believes~~we believe that ~~its~~our sources of liquidity will be adequate to meet ~~its~~our needs through the end of ~~2003,~~2004, this belief is based on a number of material assumptions, including, without limitation, assumptions about exchange rates, power market pool prices and the ability of ~~its~~our subsidiaries to pay dividends and access the ~~timing and amount of asset sale proceeds.~~capital markets for additional financing. In addition, ~~there~~our project subsidiaries’ ability to declare and pay cash dividends to us (at the parent company level) is subject to certain limitations contained in project loans, governmental provisions and other agreements to which our project subsidiaries are subject. We can beprovide no assurance that these sources will be available when needed or that ~~AES’s~~our actual cash requirements will not be greater than anticipated. We have met our interim needs for shorter-term and working capital financing at the parent company level with available cash balance and through a secured revolving credit facility of $450 million, which is part of our $650 million senior secured credit facilities. We did not have any outstanding borrowings under the revolving credit facility at March 31, 2004.
Various debt instruments at the parent company level, including our senior secured credit facilities, senior secured notes and senior subordinated notes contain certain restrictive covenants. The covenants provide for, among other items:
•      limitations on other indebtedness, liens, investments and guarantees,
•      restrictions on dividends and redemptions and payments of unsecured and subordinated debt and the use of proceeds,
•      restrictions on mergers and acquisitions, sales of assets, leases, transactions with affiliates and off balance sheet and derivative arrangements, and
•      maintenance of certain financial ratios.

~~Foreign currency exchange rates~~ Non-Recourse Debt Financing

Through its equity investments in foreign affiliates and subsidiaries, AES operates in jurisdictions with currencies other than the Company’s functional currency, the U.S. dollar. Such investments and advancesIPALCO. On January 13, 2004, IPL issued $100 million of 6.60% first mortgage bonds due January 1, 2034. The net proceeds of approximately $99 million were ~~made~~used to ~~fund equity requirements~~retire $80 million of 6.05% first mortgage bonds due February 2004 and to ~~provide collateral~~reimburse IPL’s treasury for ~~contingent obligations. Due primarily~~expenditures previously incurred in connection with its capital expenditure program.
Project level defaults. While the lenders under our non-recourse debt financings generally do not have direct recourse to the ~~long-term nature~~parent company, defaults thereunder can still have important consequences for our results of ~~the investments~~operations and advances, the Company accounts for any adjustments resulting from translation of the financial statements of its foreign investments as a charge or credit directly to a separate component of stockholders’ equity until such timeliquidity, including, without limitation:
•      reducing our cash flows as the ~~Company realizes~~subsidiary will typically be prohibited from distributing cash to the parent level during the pendancy of any default,
•      triggering our obligation to make payments under any financial guarantee, letter of credit or other credit support we have provided to or on behalf of such ~~charge or credit. At that time, any differences would be recognized~~subsidiary,
•      causing us to record a loss in the ~~statement of operations as gains or losses.~~event the lender forecloses on the assets, and

•      triggering defaults in our outstanding debt at the parent level. For example, our revolving credit agreement and outstanding senior notes, senior subordinated notes and junior subordinated notes at the parent level include events of default for certain bankruptcy related events involving material subsidiaries. In addition, ~~certain~~our revolving credit agreement at the parent level includes events of ~~the Company’s foreign~~default related to payment defaults and accelerations of outstanding debt of material subsidiaries.
Certain of our subsidiaries ~~have entered into obligations~~are currently in ~~currencies other than~~default with respect to all or a portion of their own functional currencies or the U.S. dollar. These subsidiaries have attempted to limit potential foreign exchange exposure by entering into revenue contracts that adjust to changes in the foreign exchange rates. Certain foreign affiliates and subsidiaries operate in countries where the local inflation rates are greater than U.S. inflation rates. In such cases, the foreign currency tends to devalue relative to the U.S. dollar over time.outstanding indebtedness. The Company’s subsidiaries and affiliates have entered into revenue contracts which attempt to adjust for these differences; however, there can be no assurance that such adjustments will compensate for the full effect of currency devaluation, if any. The Company had approximately $3.6 billion in cumulative foreign currency translation adjustment losses at September 30, 2003 reported in accumulated other comprehensive losstotal debt classified as current in the accompanying consolidated balance ~~sheet.~~sheets relating to such defaults was $1.4 billion at March 31, 2004; approximately $571 million is held at discontinued operations and businesses held for sale.

52AES Elpa and AES Transgas. On December 22, 2003, the Company concluded negotiations with the Brazilian National Development Bank (“BNDES”) and its wholly owned subsidiary, BNDES Participações S.A. (“BNDESPAR”), to restructure the outstanding indebtedness of the Company’s Brazilian subsidiaries AES Transgas and AES Elpa, the holding companies of Eletropaulo (“BNDES Debt Restructuring”). On January 19, 2004 and on January 23, 2004, approval was received on the BNDES Debt Restructuring from ANEEL and the Brazilian Central Bank, respectively. The transaction became effective on January 30, 2004 after the required approvals were obtained and a payment of $90 million was made by AES to BNDES..
Under the BNDES Debt Restructuring, all of the Company’s equity interests in Eletropaulo, AES Uruguaiana Empreendimentos Ltda. (“AES Uruguaiana”) and AES Tiete S.A. (“AES Tiete”) were transferred to Brasiliana Energia, S.A. (“Brasiliana Energia”), a holding company created for the debt restructuring. The debt at AES Elpa and AES Transgas was also transferred to Brasiliana Energia.
In exchange for the termination of $869 million of outstanding Brasiliana Energia debt and accrued interest, BNDES received $90 million in cash, 53.85% ownership of Brasiliana Energia, and a call option (the “Sul Option). The Sul Option, which would require the Company to contribute its equity interest in AES Sul to Brasiliana Energia, will be exercisable at the Company’s announcement to BNDES of the completion of the AES Sul restructuring or June 22, 2005, subject to a six month extension under certain circumstances. The debt refinancing was accounted for as a modification of a debt instrument; therefore, the $26 million of face value of remaining debt due in excess of carrying value will be amortized using the effective interest rate method over the life of the debt
To effect the new ownership structure, Brasiliana Energia issued 50.01% of its common shares to AES and the remainder to BNDES. It also issued a majority of its non-voting preferred shares to BNDES. As a result, BNDES effectively owns 53.85% of the total capital of Brasiliana Energia. Pursuant to the shareholders’ agreement, AES controls Brasiliana Energia through its ownership of a majority of the voting shares of the company.
As a result of the stock issuance, AES recorded minority interest for BNDES’s share of Brasiliana Energia of $329 million. In addition, the estimated fair value of the Sul Option was recorded as a liability in the amount of $37 million and will be marked to market in future quarters to reflect the changes in the underlying value of AES Sul, prior to BNDES exercise or the expiration of its call option.
38

~~Forward-looking statements~~
~~Certain statements contained~~AES treated the issuance of new shares in ~~this Form 10-Q are forward-looking statements~~Brasiliana Energia to BNDES as a capital transaction in accordance with Staff Accounting Bulletin No. 51 “Accounting for Sales of Stock by a Subsidiary.” The net loss of $442 million has been reported as an adjustment to AES’s additional paid-in capital on the consolidated balance sheet. The net loss includes the write-off of amounts previously recorded through accumulated other comprehensive loss related to that ~~term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as~~portion of the ~~date hereof. Forward-looking statements can be identified by the use~~Company’s investment which was effectively transferred to BNDES (53.85% of forward-looking terminology such as “believe,” “expects,” “may,” “intends,” “will,” “should” or “anticipates” or the negative forms or other variations of these terms or comparable terminology, or by discussions of strategy. Future results covered by the forward-looking statements may not be achieved. Forward-looking statements are subjectBrasiliana Energia). The write-offs included $769 million related to ~~risks, uncertainties~~currency translation losses and ~~other factors, which could cause actual results~~$86 million related to differ materially from future results expressed or implied by such forward-looking statements. The most significant risks, uncertainties and other factors are discussed in the Company’s Annual Report on Form 10-K. You are urged to read this document and carefully consider such factors.minimum pension liability adjustments. See Note 8 “Comprehensive (Loss) Income”.

The remaining outstanding debt owed to BNDESPAR by Brasiliana Energia includes approximately $510 million of convertible debentures, non-recourse to AES (the “Convertible Debentures”). The Convertible Debentures bear interest at a nominal rate of 9.0% per annum, and an effective rate of 9.67% indexed in U.S. dollars, and will amortize over an 11- year period with principal repayments beginning in 2007. Principal payments of $20 million, $45 million and $445 million will be due in 2007, 2008 and thereafter. Brasiliana Energia may not pay any dividends until 2007, at which point it may pay dividends up to 10% of its available cash to its shareholders.
In the event of a default under the Convertible Debentures, the debentures can be converted by BNDESPAR into common shares of Brasiliana Energia in an amount sufficient to give BNDESPAR operational and managerial control of Brasiliana Energia. Under the terms of the BNDES Debt Restructuring, the Company will, subject to certain protective rights granted to BNDESPAR under the Restructuring Documents, retain operational and managerial control of Eletropaulo, AES Uruguaiana and AES Tiete as long as no default under the Convertible Debentures occurs. The default and penalty interest accrued on the AES Transgas and AES Elpa debt will be pro rata forgiven as Brasiliana Energia makes timely payments on the new debt. If Brasiliana Energia does not make timely payments on the Convertible Debentures, this default and penalty interest would be immediately due and payable.
Eletropaulo. On March 12, 2004, Eletropaulo finalized its re-profiling of approximately $800 million in outstanding debt. As a result of this transaction, approximately 70% of the re-profiled debt will be denominated in Brazilian Reais. The syndicated debt has four tranches for both the U.S. Dollar and Brazilian Real debt portions with maturities through 2008. The interest rate on the U.S. Dollar re-profiled debt is Libor plus 2.5% to 4.75% at March 31, 2004, and the interest rate on the re-profiled Brazilian Real debt is Certificate of Interbank Deposits (“CDI”) plus 2.5% to 4.75% which reduces to Libor and CDI plus 2.25% to 4.5% upon satisfaction of a post closing down payment. CDI is an index based upon the average rate per cost of loans negotiated among the banks within Brazil. On March 31, 2004, Libor was 1.11% and CDI was 16.02%. A down payment of approximately 17% of the principal amount is expected in the first half of 2004 and is to be provided from the amount of the loan proceeds expected from certain loans to be provided by BNDES associated with rationing and Parcel A tracking account (CVA) tariff deferrals. After making the down payment, approximately $121 million, $214 million, $170 million and $146 million of principal repayments will be due in 2005, 2006, 2007 and 2008, respectively. No principal payments are due in 2004. Approximately $69 million of receivables have been provided as collateral to the debt. Eletropaulo may pay dividends after March 31, 2005 to the extent it is required by Brazilian law, or certain dividend conditions (which include payment of scheduled amortization and the compliance with financial ratios) are met. The refinancing was accounted for as a modification of debt instruments; therefore, the bank fees of $19 million associated with this transaction were capitalized and will be amortized using the effective interest rate method over the life of the loan. Third party costs were expensed. The agreement with Eletropaulo creditors resolves all the defaults except those relating to approximately $2.2 million of outstanding debt, classified as current at March 31, 2004, with its commercial paper lenders. These outstanding defaulted debts do not have any cross-default or similar effects on any other debt. The Company is studying the alternatives to solve this pending default.
Sul.    The efforts to restructure the debt at Sul and AES Cayman Guaiba, a subsidiary of the Company that owns the Company's interest in Sul, are in process and have been focused in the following areas:
•
Successful restructuring of both the outstanding $71 million debenture agreement and the $10 million working capital loan (amounts based on December 31, 2003 exchange rate). The debenture agreement was amended to extend the amortization period to 5 principal payments ending in 2008 and 20 quarterly interest payments for the first tranche and 5 annual interest payments for the second tranche ending in 2008. The working capital loan was amended to extend the amortization period from 12 to 36 monthly payments ending in 2006. Under the debenture agreement, Sul was required to sign the refinancing agreements relating to the $300 million syndicated loan referred to below by April 30, 2004. The signing of these documents has not occurred, resulting in a covenant default of this facility. Sul, AES Cayman Guiaba and the lenders under the $300 million syndicated loan continue to negotiate the final terms of the restructuring and Sul has called a meeting of its debenture holders to amend the debenture agreement to reflect the current status of these negotiations.
•
Restructuring of the $300 million syndicated loan. The parties have entered into a non-binding term sheet and continue to negotiate the final terms of the restructuring. The lenders have not extended any waivers for the outstanding defaults nor have they exercised their rights under the $50 million AES parent guarantee. There can be no assurances that the restructuring of this loan will be completed.
•
Successful restructuring of an approximately $47.4 million outstanding payable to Itaipu for energy purchases from the Itaipu hydroelectric station. The parties agreed to extend the amortization period to monthly principal and interest payments ending in 2012, with an initial grace period of 12 months.
•
On March 26, 2004, Sul shareholders approved the grouping of 4,000 shares into one new share, at a cost of $2.7 million.
Sul and AES Cayman Guaiba will continue to face shorter-term debt maturities in 2004 and 2005, but given that a bankruptcy proceeding would generally be an unattractive remedy for each of its lenders as it could result in an intervention by ANEEL or a termination of Sul's concession, we think such an outcome is unlikely; however, we can not be assured that future negotiations will be successful, and AES may have to write-off some or all of the assets of Sul or AES Cayman Guaiba. The Company's total investment associated with Sul as of March 31, 2004 was approximately $271 million.
39

Gener. Pursuant to Gener’s plan to refinance $700 million of its indebtedness, (i) on February 27, 2004, AES invested through its subsidiary, Inversiones Cachagua Ltd. (“Cachagua”), a holding company of Gener, approximately $298 million in Gener as settlement of Cachagua intercompany loan with Gener; (ii) Gener issued $400 million of bonds that mature in 2014 and carry a coupon rate of 7.5%. In anticipation of the issuance of the bonds, a series of treasury lock agreements were executed to reduce Gener’s exposure to the underlying interest rate of the bonds. The treasury lock agreements were not documented as cash flow hedges at the time they were executed. The fair market value of these transactions represented a loss of $22.1 million before minority interest and income taxes and was recognized in the first quarter of 2004; (iii) Gener executed cash tender offers for its $477 million 6% Chilean Convertible Notes and 6% U.S. Convertible Notes due 2005 (excluding non-conversion premium paid at maturity), and for its $200 million 6.5% Yankee Notes due 2006. During March and April 2004, Gener repurchased approximately $145 million of 6.5% Yankee Bonds and $56 and $157 million of the 6% U.S. and 6% Chilean Convertible Notes, respectively; and (iv) The equity capital markets transaction pursuant to which Cachagua planned to sell a portion of its Gener shares was terminated in early April due to uncertainty related to gas restrictions in Argentina. Cachagua had intended to use a portion of the proceeds from the equity sale to purchase its pro rata share, up to $97.8 million, of the new common Gener shares to be offered to existing shareholders in May 2004 as part of the restructuring plan. Notwithstanding its termination of the secondary Gener share sale, Cachagua is obligated to subscribe to its pro rata portion of the new Gener equity issuance. Cachagua placed $97.8 million, which represents its share of the dividend distributed by Gener on February 27, 2004, to all holders of Gener’s common stock plus the proceeds Cachagua received from a foreign exchange hedge, into a trust to ensure that it will have sufficient funds to purchase its pro rata share of the new common shares to be issued by Gener. Cachagua’s obligation to (i) contribute capital or (ii) subscribe to its pro rata portion of an offering of Gener common shares, may be funded with either a new financing, an additional capital contribution by AES or by using the dividend that is held in the trust account.
In addition, on April 16, 2004, Gener completed the restructuring of $143 million debt of its subsidiaries TermoAndes S.A. (“TermoAndes”) and InterAndes S.A. (“InterAndes”). Under the terms of the agreement, lenders and swap counterparties received an upfront payment that was funded with $36 million of cash held in the TermoAndes and InterAndes trust accounts, and a cash contribution of $26 million by Gener. In exchange, the lenders and swap counterparties extended a new loan to Gener to enable it to repurchase the original notes and repay the swap termination fee. The new loan maturity was extended to 2010. As a result of the debt restructuring, the TermoAndes debt is no longer in default and has been re-profiled in the accompanying consolidated balance sheets as $74 million current non-recourse debt and $69 million non-current non-recourse debt.
Dominican Republic. At the end of 2003, Los Mina and Andres, both wholly owned subsidiaries of AES in the Dominican Republic, each had covenant defaults on its outstanding debt. In addition, on March 11, 2004, Los Mina failed to make a $20 million revolving loan payment under its existing credit agreement. On April 30, 2004, an amendment to the existing Los Mina credit agreement was completed that extended the maturity of the loan and increased the interest rate. The Los Mina credit agreement amendment cured the Los Mina payment default and cross default under the Andres credit agreement. As of March 31, 2004, the debt for both Los Mina and Andres was reported as current non-recourse debt in the accompanying consolidated balance sheets because of the covenant defaults. Discussion with the lenders are ongoing. These businesses expect to receive waivers for the covenant defaults upon completion of those discussions.
Venezuela. At March 31, 2004, our subsidiary EDC was not in compliance with the net worth covenant in two facilities totaling $101 million, $94 million and $7 million, respectively. The respective covenants require EDC to maintain Consolidated Tangible Net Worth of $1.5 billion based on Venezuelan GAAP. Due to the impact of the devaluation of Venezuelan Bolivar in the first quarter of 2004, EDC did not meet this covenant. On May 3, 2004, EDC negotiated an amendment to the $94 million facility to permit calculation pursuant to U.S. GAAP, which cured the covenant default. We continue to pursue amendment of the $7 million facility. As of March 31, 2004, $56 million of the debt was classified as long-term non-recourse debt in the accompanying consolidated balance sheets.
None of the subsidiaries referred to above that are currently in default are owned by subsidiaries that currently meet the applicable definition of materiality in AES’s corporate debt agreements in order for such defaults to trigger an event of default or permit an acceleration under such indebtedness. However, as a result of additional dispositions of assets, other significant reductions in asset carrying values or other matters in the future that may impact our financial position and results of operations, it is possible that one or more of these subsidiaries could fall within the definition of a “material subsidiary” and thereby upon an acceleration trigger an event of default and possible acceleration of the indebtedness under the AES parent company’s senior notes, senior subordinated notes and junior subordinated notes.
40

~~Item~~ITEM 3. ~~Quantitative and Qualitative~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ~~Disclosures about Market Risk.~~

The Company believes that there have been no material changes in its exposure to market risks during the ~~third~~first quarter of ~~2003~~2004 compared with the exposure set forth in the Company’s Annual Report filed with the Commission on Form 10-K for the year ended December 31, ~~2002.~~2003.

~~Item~~ITEM 4. ~~Controls~~CONTROLS AND PROCEDURES ~~and Procedures~~

Evaluation of Disclosure Controls and Procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 ~~(“Exchange Act”)~~ Rules 13a-15(e) ~~or 15d-15~~and 15-d-15 (e)) as ~~of the end of the period ended September 30, 2003, have concluded, based on the evaluation of these controls and procedures~~ required by paragraph (b) of the ~~Securities and~~ Exchange ~~Act~~ Rules 13a-15 or 15d-15, have concluded that as of the March 31, 2004, our disclosure controls and procedures were effective ~~as of that date~~ to ensure that material information relating to us and our consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified in ~~a timely manner.~~the Securities and Exchange Commission’s rules and forms.

Changes in Internal Controls. There were no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of ~~the~~ Exchange Act Rules 13a-15 or 15d-15 that occurred during the ~~three months~~quarter ended ~~September 30, 2003~~March 31, 2004 that have materially affected, or are reasonably likely to materially affect, ~~the Company’s~~our internal ~~control~~controls over financial reporting.

5341

PART II

~~OTHER INFORMATION~~ITEM 1. LEGAL PROCEEDINGS

~~Item 1.~~ ~~Legal~~ ~~Proceedings~~

See discussion of litigation and other proceedings in Part I, Note 96 to the consolidated financial statements which is incorporated herein by reference.

~~Item~~ITEM 2. ~~Changes in~~ CHANGES IN SECURITIES AND USE OF PROCEEDS~~Securities and Use of Proceeds.~~

In ~~September 2003~~the first quarter of 2004, the Company issued an aggregate of ~~2,670,912~~6,143,500 shares of its common stock in exchange for ~~$20,000,000~~$50,000,000 aggregate principal amount of the Company’s outstanding senior subordinated notes. The shares were issued without registration in reliance upon Section 3(a)(9) under the Securities Act of 1933.

~~Item~~ITEM 3. ~~Defaults~~ DEFAULTS UPON SENIOR SECURITIES~~Upon Senior Securities.~~

None

~~Item~~ITEM 4. ~~Submission~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ~~of Matters to a Vote of Security Holders.~~

None

~~Item~~ITEM 5. ~~Other~~OTHER INFORMATION ~~Information.~~

The Securities and Exchange Commission’s Rule 10b5-1 permits directors, officers, and other key personnel to establish purchase and sale programs. The rule permits such persons to adopt written plans at a time before becoming aware of material nonpublic information and to sell shares according to a plan on a regular basis (for example, weekly or monthly), regardless of any subsequent nonpublic information they receive. Rule 10b5-1 plans allow systematic, pre-planned sales that take place over an extended period and should have a less disruptive influence on the price of our stock. Plans of this type inform the marketplace about the nature of the trading activities of our directors and officers. We recognize that our directors and officers may have reasons totally unrelated to their assessment of the company or its prospects in determining to effect transaction in our common stock. Such reasons might include, for example, tax and estate planning, the purchase of a home, the payment of college tuition, the establishment of a trust, the balancing of assets, or other personal reasons. None

~~Mr. Roger Sant and Mr. Robert Hemphill have adopted trading plans pursuant to Rule 10b5-1.~~ ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

~~Item 6.~~ ~~Exhibits~~ ~~and Reports on Form 8-K.~~

(a) Exhibits.

3.1*		Sixth Amended and Restated Certificate of Incorporation of The AES Corporation (Incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2001 filed on May 15, 2001).
3.2*		~~By-Laws of The AES Corporation (Incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 filed on March 26, 2003).~~
10.1*		Second Amended and Restated Credit and Reimbursement Agreement dated as of July 29, 2003 among The AES Corporation, as Borrower, AES Oklahoma Holdings, L.L.C., AES Hawaii Management Company, Inc., AES Warrior Run Funding, L.L.C., and AES New York Funding, L.L.C., as Subsidiary Guarantors, Citicorp USA, INC., as Administrative Agent, Citibank, N.A., as Collateral Agent, Citigroup Global Markets Inc., as Lead Arranger and Book Runner, Banc Of America Securities L.L.C., as Lead Arranger and Book Runner and as Co-Syndication Agent (Term Loan Facility), Deutsche Bank Securities Inc., as Lead Arranger and Book Runner (Term Loan Facility), Union Bank of California, N.A., as Co-Syndication Agent (Term Loan Facility) and as Lead Arranger and Book Runner and as Syndication Agent (Revolving Credit Facility), Lehman Commercial Paper Inc., as Co-Documentation Agent (Term Loan Facility), UBS Securities LLC. as Co-Documentation Agent (Term Loan Facility), Societe General, as Co-Documentation Agent (Revolving Credit Facility), and The Banks Listed Herein.
10.2*		~~First Supplemental Indenture dated as of July 29, 2003 to Senior Indenture dated as of December 13, 2002,~~

among The AES Corporation as the Company and AES Hawaii Management Company, Inc., AES New York Funding, L.L.C., AES Oklahoma Holdings, L.L.C., AES Warrior Run Funding, L.L.C., as Subsidiary Guarantors party hereto and Wells Fargo Bank Minnesota, National Association as Trustee.
31.1

Certification of principal executive officer required by Rule 13a-14(a) of the Exchange ~~Act~~Act.
31.2

Certification of principal financial officer required by Rule 13a-14(a) of the Exchange ~~Act~~Act.
32.1

Certification of principal executive officer and principal financial officer required by Rule 13a-14(b) or 15d-14(b) of the Exchange ~~Act~~Act.
10.1
THIRD AMENDED AND RESTATED CREDIT AND REIMBURSEMENT AGREEMENT dated as of March 17, 2004 among THE AES CORPORATION, a Delaware corporation , the SUBSIDIARY GUARANTORS listed herein, the BANKS listed on the signature pages hereof, CITIGROUP GLOBAL MARKETS INC., as Lead Arranger and Book Runner, BANC OF AMERICA SECURITIES LLC, as Lead Arranger and Book Runner and as Co-Syndication Agent, DEUTSCHE BANK SECURITIES INC, as Lead Arranger and Book Runner, UNION BANK OF CALIFORNIA, N.A., as Co-Syndication Agent and as Lead Arranger and Book Runner and as Syndication Agent, LEHMAN COMMERCIAL PAPER INC., as Co-Documentation Agent, UBS SECURITIES LLC, as Co-Documentation Agent, SOCIÉTÉ GÉNÉRALE, as Co-Documentation Agent, CREDIT LYONNAIS NEW YORK BRANCH, as Co-Documentation Agent, CITICORP USA, INC., as Administrative Agent for the Bank Parties and CITIBANK, N.A., as Collateral Agent for the Bank Parties.

42
* - previously filed

(b) Reports on Form ~~8-K~~8-K.

The Company filed the following reports on Form 8-K during the quarter ended ~~September 30, 2003.~~March 31, 2004. Information regarding the items reported on is as follows:

Date

Item Reported On
February 5, 2004
Items 12 and 5— disclosure of the Company’s financial results for the year ended December 31, 2003.

~~July 2, 2003~~February 13, 2004

~~Item~~Items 5 – Disclosure relating to the status of discussion on the restructuring proposal for the Registrant’s subsidiary, AES Drax Holdings Limited, including the Form 6-K relating to the same matter filed by AES Drax Holdings Limited.
~~July 30, 2003~~
~~Item 12 – Disclosure of the Company’s second-quarter earnings.~~
~~August~~and 7 ~~2003~~
~~Item 9 – Disclosure~~— disclosure relating to the Company’s ~~withdrawal of support for Drax restructuring including~~filing the Form ~~6-K relating to the same matter filed by the Company’s subsidiary,~~of Tenth Supplemental Indenture between The AES ~~Drax Holdings Limited.~~
~~August 15, 2003~~
~~Item 5 – Disclosure of certain recent developments at the Company’s subsidiaries, Eletropaulo, AES Sul~~Corporation and ~~AES Cayman Guaiba.~~Wells Fargo Bank Minnesota, N. A.

5543

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

~~THE~~The AES ~~CORPORATION~~Corporation

(Registrant)

Date: May 10, 2004
By:
/s/ Barry J. Sharp
~~Date: November 13, 2003~~
~~By:~~
Name: Barry J. Sharp

Title: Executive Vice President and Chief
Financial Officer

5644

EXHIBIT INDEX

Exhibit

Description of Exhibit

Sequentially
Numbered
Page
31.1

Certification of principal executive officer required by Rule 13a-14(a) of the Exchange ~~Act~~Act.

31.2

Certification of principal financial officer required by Rule 13a-14(a) of the Exchange ~~Act~~Act.

32.1

Certification of principal executive officer and principal financial officer required by Rule 13a-14(b) or 15d-14(b) of the Exchange ~~Act~~Act.
10.1
THIRD AMENDED AND RESTATED CREDIT AND REIMBURSEMENT AGREEMENT dated as of March 17, 2004 among THE AES CORPORATION, a Delaware corporation , the SUBSIDIARY GUARANTORS listed herein, the BANKS listed on the signature pages hereof, CITIGROUP GLOBAL MARKETS INC., as Lead Arranger and Book Runner, BANC OF AMERICA SECURITIES LLC, as Lead Arranger and Book Runner and as Co-Syndication Agent, DEUTSCHE BANK SECURITIES INC, as Lead Arranger and Book Runner, UNION BANK OF CALIFORNIA, N.A., as Co-Syndication Agent and as Lead Arranger and Book Runner and as Syndication Agent,LEHMAN COMMERCIAL PAPER INC.,as Co-Documentation Agent, UBS SECURITIES LLC, as Co-Documentation Agent, SOCIÉTÉ GÉNÉRALE, as Co-Documentation Agent, CREDIT LYONNAIS NEW YORK BRANCH, as Co-Documentation Agent, CITICORP USA, INC., as Administrative Agent for the Bank Parties and CITIBANK, N.A., as Collateral Agent for the Bank Parties.

5745

~~(Mark One)~~ý

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~September 30, 2003~~March 31, 2004

Oror

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		54-1163725
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1001 North 19th Street, Arlington, Virginia		22209
(Address of Principal Executive Offices)		(Zip Code)

~~Part I.~~PART I	~~Financial Information~~
~~Item 1.~~	~~Interim Financial Statements:~~
	~~Consolidated Statements of Operations~~
ITEM 1. INTERIM FINANCIAL STATEMENTS	~~Consolidated Balance Sheets~~
	~~Consolidated Statements of Cash Flows~~
	~~Notes to Consolidated Financial Statements~~
~~Item~~ITEM 2. MANAGEMENTS’ DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	~~Discussion and Analysis of Financial Condition and Results of Operations~~
~~Item~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	~~Quantitative and Qualitative Disclosures About Market Risk~~
~~Item~~ITEM 4. CONTROLS AND PROCEDURES	~~Controls and Procedures~~

~~Part II.~~PART II	~~Other Information~~

~~Item~~ITEM 1. LEGAL PROCEEDINGS	~~Legal Proceedings~~
~~Item~~ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS	~~Changes in Securities and Use of Proceeds~~
~~Item~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES	~~Defaults Upon Senior Securities~~
~~Item~~ITEM 4. SUMBISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	~~Submission of Matters to a Vote of Security Holders~~
~~Item~~ITEM 5. OTHER INFORMATION	~~Other Information~~
~~Item~~ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K	~~Exhibits and Reports on Form 8-K~~
~~Signatures~~SIGNATURES
CERTIFICATIONS

	Three Months Ended						Nine Months Ended
	September 30, 2003			September 30, 2002 (As restated (1))			September 30, 2003			September 30, 2002 (As restated (1))
	(in millions, except per share amounts)						(in millions, except per share amounts)
Revenues:
Regulated	$	1,217		$	1,081		$	3,328		$	3,228
Non-regulated	1,105			815			3,000			2,478
Total revenues	2,322			1,896			6,328			5,706
Cost of sales:
Regulated	943			834			2,659			2,582
Non-regulated	725			523			1,937			1,587
Total cost of sales	1,668			1,357			4,596			4,169

Selling, general and administrative expenses	(36		)	(10		)	(97		)	(64		)
Interest expense	(504		)	(471		)	(1,535		)	(1,310		)
Interest income	82			72			215			204
Other expense	(29		)	(28		)	(79		)	(35		)
Other income	36			51			162			112
Loss on sale or write-down of investments and asset impairment expense	(75		)	(168		)	(106		)	(283		)
Foreign currency transaction gains (losses), net	(39		)	(243		)	114			(455		)
Equity in pre-tax earnings (losses) of affiliates	12			(20		)	57			35
Income (loss) before income taxes and minority interest	101			(278		)	463			(259		)
Income tax expense (benefit)	20			(91		)	128			(37		)
Minority interest in net income (losses) of subsidiaries	35			20			88			(11		)
Income (loss) from continuing operations	46			(207		)	247			(211		)
Income (loss) from operations of discontinued businesses (net of income tax (expense) benefit of $(32), $16, $(4) and $(12), respectively)	30			(108		)	(204		)	(186		)
Income (loss) before cumulative effect of accounting change	76			(315		)	43			(397		)
Cumulative effect of accounting change (net of income tax benefits of $0, $0, $1 and $72, respectively)	—			—			(2		)	(346		)
Net income (loss)	$	76		$	(315	)	$	41		$	(743	)

Basic earnings per share:
Income (loss) from continuing operations	$	0.07		$	(0.38	)	$	0.42		$	(0.39	)
Discontinued operations	0.05			(0.20		)	(0.35		)	(0.34		)
Cumulative effect of accounting change	—			—			—			(0.65		)
Total	$	0.12		$	(0.58	)	$	0.07		$	(1.38	)
Diluted earnings per share:
Income (loss) from continuing operations	$	0.07		$	(0.38	)	$	0.42		$	(0.39	)
Discontinued operations	0.05			(0.20		)	(0.35		)	(0.34		)
Cumulative effect of accounting change	—			—			—			(0.65		)
Total	$	0.12		$	(0.58	)	$	0.07		$	(1.38	)

	September 30, 2003			December 31, 2002			March 31, 2004			December 31, 2003
	($ in millions)						($ in millions)
Assets
ASSETS
Current assets:
Cash and cash equivalents	$	1,477		$	797		$	1,120		$	1,737
Restricted cash	433			160			725			288
Short-term investments	204			177			201			189
Accounts receivable, net of reserves of $360 and $375, respectively	1,263			1,078
Accounts receivable, net of reserves of $275 and $291, respectively							1,204			1,211
Inventory	399			366			357			376
Receivable from affiliates	16			25			3			3
Deferred income taxes — current	127			130			150			136
Prepaid expenses	85			64			103			64
Other current assets	769			923			695			677
Current assets of discontinued operations and businesses held for sale	141			629			223			205
Total current assets	4,914			4,349			4,781			4,886
Property, plant and equipment:
Property, Plant and Equipment:
Land	754			699			739			733
Electric generation and distribution assets	20,883			18,313			21,051			21,087
Accumulated depreciation and amortization	(4,739		)	(4,049		)	(4,745		)	(4,593		)
Construction in progress	2,048			3,211			1,389			1,278
Property, plant and equipment — net	18,946			18,174			18,434			18,505
Other assets:
Other Assets:
Deferred financing costs — net	432			397			455			430
Investments in and advances to affiliates	675			678			665			648
Debt service reserves and other deposits	380			508			539			534
Goodwill — net	1,385			1,388			1,381			1,378
Deferred income taxes — noncurrent	999			939			788			781
Long-term assets of discontinued operations and businesses held for sale	584			6,111			746			750
Other assets	2,100			1,686			1,945			1,992
Total other assets	6,555			11,707			6,519			6,513
Total assets	$	30,415		$	34,230		$	29,734		$	29,904

	Three Months Ended
	March 31, 2004			March 31, 2003 (As restated (1))
	(in millions)
Revenues
Regulated	$	1,146		$	966
Non-regulated	1,111			945
Total revenues	2,257			1,911
Cost of sales
Regulated	(889		)	(751		)
Non-regulated	(688		)	(586		)
Total cost of sales	(1,577		)	(1,337		)
Corporate and business development expenses	(48		)	(29		)
Interest expense	(493		)	(500		)
Interest income	69			69
Other expense	(25		)	(27		)
Other income	11			20
Loss on sale of investments	(1		)	—
Foreign currency transaction (losses) gains on net debt	(8		)	82
Equity in earnings of affiliates	16			24
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST	201			213
Income tax expense	64			51
Minority interest in net income of subsidiaries	63			31
INCOME FROM CONTINUING OPERATIONS	74			131
Loss from operations of discontinued businesses (net of income taxes of $2 and $(4), respectively)	(26		)	(36		)
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE	48			95
Cumulative effect of accounting change (net of income taxes of $0 and $1, respectively)	—			(2		)
Net income	$	48		$	93
BASIC EARNINGS PER SHARE:
Income from continuing operations	$	0.12		$	0.23
Discontinued operations	(0.04		)	(0.07		)
Cumulative effect of accounting change	—			—
BASIC EARNINGS PER SHARE	$	0.08		$	0.16
DILUTED EARNINGS PER SHARE:
Income from continuing operations	$	0.12		$	0.23
Discontinued operations	(0.04		)	(0.06		)
Cumulative effect of accounting change	—			—
DILUTED EARNINGS PER SHARE	$	0.08		$	0.17

	Nine Months Ended
	September 30, 2003			September 30, 2002
	($ in millions)
Operating activities:
Net cash provided by operating activities	$	1,086		$	1,182

Investing activities:
Property additions and project development costs	(878		)	(1,742		)
Proceeds from sales of interests in subsidiaries and assets, net of cash	707			285
Cash acquired in Eletropaulo share swap	—			162
Purchase of short-term investments, net	(25		)	(54		)
Proceeds from sale of available-for-sale securities	—			92
Affiliate advances and equity investments	—			(9		)
Increase in restricted cash	(322		)	(116		)
Debt service reserves and other assets	108			94
Acquisitions, net of cash acquired	—			(35		)
Other	(16		)	—
Net cash used in investing activities	(426		)	(1,323		)

Financing activities:
Borrowings (repayments) under the revolving credit facilities, net	(228		)	549
Issuance of non-recourse debt and other coupon bearing securities	4,120			1,832
Repayments of non-recourse debt and other coupon bearing securities	(4,200		)	(2,011		)
Payments for deferred financing costs	(106		)	(20		)
Proceeds from sale of common stock	335			—
Distributions to minority interests	(19		)	(7		)
Contributions by minority interests	26			—
Other	(2		)	—

Net cash (used in) provided by financing activities	(74		)	343
Effect of exchange rate change on cash	34			(89		)
Total increase in cash and cash equivalents	620			113
Decrease in cash and cash equivalents of discontinued operations and businesses held for sale	60			59
Cash and cash equivalents, beginning	797			761
Cash and cash equivalents, ending	$	1,477		$	933

Supplemental interest and income taxes disclosures:
Cash payments for interest – net of amounts capitalized	$	1,280		$	1,144
Cash payments for income taxes – net of refunds	88			201

Supplemental schedule of noncash investing and financing activities:
Liabilities consolidated in Eletropaulo transaction	—			4,907
Common stock issued for debt retirement	43			53
Debt assumed by third parties on asset sales and disposals	1,000			—

	Three Months Ended September 30,
	2003					2002
	Income (loss) from continuing operations		Weighted Average Shares	EPS		Income (loss) from continuing operations			Weighted Average Shares	EPS

Basic earnings per share:
Income (loss) from continuing operations	$	46	620	$	0.07	$	(207	)	542	$	(0.38	)
Effect of assumed conversion of dilutive securities:
Options and warrants (Note 12)	—		4	—		—			—	—
Diluted income (loss) per share:	$	46	624	$	0.07	$	(207	)	542	$	(0.38	)

	Three Months Ended March 31,
	2004					2003
	Income from continuing operations		Weighted Average Shares	EPS		Income from continuing operations		Weighted Average Shares	EPS
Basic earnings per share:
Income from continuing operations	$	74	627	$	0.12	$	131	561	$	0.23
Effect of assumed conversion of dilutive securities:
Options	—		6	—		—		—	—
Debt securities	—		—	—		1		6	—
Diluted earnings per share:	$	74	633	$	0.12	$	132	567	$	0.23

	Nine Months Ended September 30,
	2003					2002
	Income from continuing operations		Weighted Average Shares	EPS		Income from continuing operations			Weighted Average Shares	EPS

Basic earnings per share:
Income (loss) from continuing operations	$	247	585	$	0.42	$	(211	)	537	$	(0.39	)
Effect of assumed conversion of dilutive securities:
Options and warrants	—		3	—		—			—	—
Diluted income per share:	$	247	588	$	0.42	$	211		537	$	(0.39	)

	For the Period Ended March 31,
	2004			2003
Revenues	$	130		$	474

Loss from operations before disposal and impairment writedown (before taxes)	(41		)	(58		)

Gain on disposal, net of impairment writedowns (before taxes)	17			18

Loss from operations (before taxes)	$	(24	)	$	(40	)

Income Tax Expense/(Benefit)		2			(4)

Loss income from operations (after taxes)	$	(26	)	$	(36	)

	Nine Months Ended September 30,
	2003		2002
Revenues	$	2,012	$	2,206
Operating income	675		603
Net income	310		94

Affiliate	Country		September 30, 2003		December 31, 2002		Country	March 31, 2004		December 31, 2003
Barry	United Kingdom		100.00	%	100.00	%
CEMIG	Brazil		21.62		21.62		Brazil	21.62	%	21.62	%
Chigen affiliates	China		30.00		30.00		China	30.00		30.00
EDC affiliates	Venezuela		45.00		45.00		Venezuela	45.00		45.00
Elsta	Netherlands		50.00		50.00		Netherlands	50.00		50.00
Gener affiliates	Chile		50.00		50.00		Chile	50.00		50.00
Itabo	Dominican Republic		25.00		25.00		Dominican Republic	25.00		25.00
Kingston Cogen Ltd	Canada		50.00		50.00		Canada	50.00		50.00
Medway Power, Ltd	United Kingdom		25.00		25.00
OPGC	India	��	49.00		49.00		India	49.00		49.00

	For the Three Months Ended
	September 30, 2003		September 30, 2002
Marked-to-market gain on commodity derivatives	$	1	$	27
Gain on extinguishment of liabilities	28		14
Legal dispute settlement	4		—
Gain on sale of assets	—		8
Other income	3		2
	$	36	$	51

	For the Nine Months Ended
	September 30, 2003		September 30, 2002
Marked-to-market gain on commodity derivatives	$	—	$	58
Gain on extinguishment of liabilities	134		36
Legal dispute settlement	16		—
Gain on sale of assets	1		13
Other income	11		5
	$	162	$	112

	September 30, 2003		December 31, 2002
					March 31, 2004		December 31, 2003
Current assets	$	1,336	$	1,097	$	1,329	$	1,191
Noncurrent assets	7,285		6,751		6,787		7,016
Current liabilities	1,560		1,418		1,464		1,325
Noncurrent liabilities	3,684		3,349
Long-term liabilities					3,229		3,386
Stockholders’ equity	3,377		3,081		3,423		3,496

	Three Months Ended September 30,
	2003		2002

Net income (loss)	$	76	$	(315	)
Foreign currency translation adjustments:
Foreign currency translation adjustments arising during the period (net of income taxes of $0 and $54, respectively)	87		(608		)
Add: Discontinued foreign entity (no income tax effect)	93		—
Total foreign currency translation adjustments	180		(608		)
Derivative activity:
Reclassification to earnings (net of income taxes of $32 and $11, respectively)	71		29
Change in derivative fair value (net of income taxes of $(13) and $60, respectively)	36		(223		)
Add: Discontinued businesses (no income tax effect)	84		—
Total change in fair value of derivatives	191		(194		)

Minimum pension liability:
Discontinued businesses (net of income taxes of $5)	12		—
Comprehensive income (loss)	$	459	$	(1,117	)

	Nine Months Ended September 30,
	2003			2002
Net income (loss)	$	41		$	(743	)
Foreign currency translation adjustments:
Foreign currency translation adjustments arising during the period (net of income taxes of $0 and $95,respectively)	271			(1,944		)
Add: Discontinued foreign entity (no income tax effect)	94			1
Total foreign currency translation adjustments	365			(1,943		)
Derivative activity:
Reclassification to earnings (net of income taxes of $89 and $20, respectively)	197			61
Change in derivative fair value (net of income taxes of $56 and $93, respectively)	(129)			(324		)
Add: Discontinued businesses (no income tax effect)	84			—
Total change in fair value of derivatives	152			(263		)
Realized loss on investment sale (no income tax effect)	—			48
Minimum pension liability:
Minimum pension liability (net of income taxes of $0 and $112, respectively)	(1		)	(269		)
Add: Discontinued businesses (net of income taxes of $45 and $0, respectively)	73			—
Total change in minimum pension liability	72			(269		)
Comprehensive income (loss)	$	630		$	(3,170	)

	September 30, 2003			December 31, 2002
Cumulative foreign currency translation adjustments	$	(3,624	)	$	(3,989	)
Change in accounting principle-SFAS No. 133	(84		)	(93		)
Minimum pension liability	(500		)	(572		)
Change in derivative fair value	(162		)	(305		)
Total	$	(4,370	)	$	(4,959	)

ACCUMULATED OTHER COMPREHENSIVE LOSS	March 31, 2004
Accumulated other comprehensive loss December 31, 2003	$	(3,995		)
Comprehensive loss for the three months ended March 31, 2004	(49			)
Net income for the three months ended March 31, 2004	(48			)
Recognition of cumulative translation adjustment and minimum pension liability due to BNDES debt restructuring	855
Accumulated other comprehensive loss March 31, 2004	$		(3,237	)

	Revenues(1)		Gross Margin		Equity Earnings			Revenue (1)		Gross Margin		Equity Earnings

Quarter Ended September 30, 2003:
Quarter Ended March 31, 2004:
Contract Generation	$	817	$	327	$	12		$	868	$	359	$	16
Competitive Supply	288		53		—			243		64		—
Large Utilities	908		244		—			818		194		—
Growth Distribution	309		30		—			328		63		—
Total	$	2,322	$	654	$	12		$	2,257	$	680	$	16
Quarter Ended September 30, 2002:

Quarter Ended March 31, 2003:
Contract Generation	$	599	$	242	$	15		$	716	$	290	$	24
Competitive Supply	216		50		—			229		69		—
Large Utilities	783		199		(35		)	702		165		—
Growth Distribution	298		48		—			264		50		—
Total	$	1,896	$	539	$	(20	)	$	1,911	$	574	$	24
Nine Months Ended September 30, 2003:
Contract Generation	$	2,268	$	902	$	57
Competitive Supply	732		161		—
Large Utilities	2,387		573		—
Growth Distribution	941		96		—
Total	$	6,328	$	1,732	$	57
Nine Months Ended September 30, 2002:
Contract Generation	$	1,883	$	774	$	49
Competitive Supply	595		117		(3		)
Large Utilities	2,414		617		(11		)
Growth Distribution	814		29		—
Total	$	5,706	$	1,537	$	35

Balance at December 31, 2002	$	15
Additional liability recorded from cumulative effect of accounting change	13
Accretion expense	1
Change in the timing of estimated cash flows	(1		)

Balance at September 30, 2003	$	28

	For the Three Months ended September 30
	2003		2002
Contract generation	35	%	32	%
Competitive supply	13	%	11	%
Large utilities	39	%	41	%
Growth distribution	13	%	16	%

	For the Nine Months ended September 30
	2003		2002
Contract generation	36	%	33	%
Competitive supply	11	%	11	%
Large utilities	38	%	42	%
Growth distribution	15	%	14	%

•		Successful restructuring of both the outstanding $71 million debenture agreement and the $10 million working capital loan (amounts based on December 31, 2003 exchange rate). The debenture agreement was amended to extend the amortization period to 5 principal payments ending in 2008 and 20 quarterly interest payments for the first tranche and 5 annual interest payments for the second tranche ending in 2008. The working capital loan was amended to extend the amortization period from 12 to 36 monthly payments ending in 2006. Under the debenture agreement, Sul was required to sign the refinancing agreements relating to the $300 million syndicated loan referred to below by April 30, 2004. The signing of these documents has not occurred, resulting in a covenant default of this facility. Sul, AES Cayman Guiaba and the lenders under the $300 million syndicated loan continue to negotiate the final terms of the restructuring and Sul has called a meeting of its debenture holders to amend the debenture agreement to reflect the current status of these negotiations.

•		Restructuring of the $300 million syndicated loan. The parties have entered into a non-binding term sheet and continue to negotiate the final terms of the restructuring. The lenders have not extended any waivers for the outstanding defaults nor have they exercised their rights under the $50 million AES parent guarantee. There can be no assurances that were restructured on December 1, 2002. The restructured debentures have a partial interest payment due December 2003 and principal payments due in 12 equal monthly installments commencing on December 1, 2003. Additionally, Sul has an outstanding working capital loan of approximately $10 million (including accrued interest) which is to be repaid in 12 monthly installments commencing on January 30, 2004. Furthermore, on January 20, 2003 Sul and AES Cayman Guaiba signed a letter agreement with the agent for the banks under the $300 million AES Cayman Guaiba syndicated loan for the restructuring of the loan. A $30 million principal payment due on January 24, 2003 under the syndicated loan was waived by the lenders through April 24, 2003 and has not been paid. While the lenders have not agreed to extend any additional waivers, they have not exercised their rights under the $50 million AES parent guarantee. There can be no assurance, however, that an additional waiver or a restructuring of this loan will be completed.

•		Successful restructuring of an approximately $47.4 million outstanding payable to Itaipu for energy purchases from the Itaipu hydroelectric station. The parties agreed to extend the amortization period to monthly principal and interest payments ending in 2012, with an initial grace period of 12 months.

•		On March 26, 2004, Sul shareholders approved the grouping of 4,000 shares into one new share, at a cost of $2.7 million.

	Three Months Ended September 30, 2003		Three Months Ended September 30, 2002		% Change
	(in $millions)
Large Utilities:
North America	$	221	$	227	(3	)%
South America	523		418		25	%
Caribbean*	164		138		19	%
Total Large Utilities	$	908	$	783	16	%

Growth Distribution:
South America	$	113	$	89	27	%
Caribbean*	115		137		(16	)%
Europe/Africa	81		72		13	%
Total Growth Distribution	$	309	$	298	4	%

Total Regulated Revenues	$	1,217	$	1,081	12	%

	Three Months Ended September 30, 2003			% of Revenue		Three Months Ended September 30, 2002		% of Revenue		% Change
	(in $millions)					(in $millions)
Large Utilities:
North America	$	83		38	%	$	92	41	%	(10	)%
South America	92			18	%	64		15	%	44	%
Caribbean*	69			42	%	43		31	%	60	%
Total Large Utilities	$	244		27	%	$	199	25	%	23	%

Growth Distribution:
South America	$	28		25	%	$	27	30	%	4	%
Caribbean*	3			3	%	16		12	%	(81	)%
Europe/Africa	(1		)	(1	)%	5		7	%	(120	)%
Total Growth Distribution	$	30		10	%	$	48	16	%	(38	)%

Total Regulated Gross Margin	$	274		23	%	$	247	23	%	11	%

	Nine Months Ended September 30, 2003		Nine Months Ended September 30, 2002		% Change
	(in millions)
Large Utilities:
North America	$	628	$	621	1	%
South America	1,322		1,304		1	%
Caribbean*	437		489		(11	)%
Total Large Utilities	$	2,387	$	2,414	(1	)%

Growth Distribution:
South America	$	311	$	195	59	%
Caribbean*	376		409		(8	)%
Europe/Africa	254		210		21	%
Total Growth Distribution	$	941	$	814	16	%

Total Regulated Revenues	$	3,328	$	3,228	3	%

		among The AES Corporation as the Company and AES Hawaii Management Company, Inc., AES New York Funding, L.L.C., AES Oklahoma Holdings, L.L.C., AES Warrior Run Funding, L.L.C., as Subsidiary Guarantors party hereto and Wells Fargo Bank Minnesota, National Association as Trustee.
31.1		Certification of principal executive officer required by Rule 13a-14(a) of the Exchange ~~Act~~Act.

31.2		Certification of principal financial officer required by Rule 13a-14(a) of the Exchange ~~Act~~Act.

32.1		Certification of principal executive officer and principal financial officer required by Rule 13a-14(b) or 15d-14(b) of the Exchange ~~Act~~Act.

10.1		THIRD AMENDED AND RESTATED CREDIT AND REIMBURSEMENT AGREEMENT dated as of March 17, 2004 among THE AES CORPORATION, a Delaware corporation , the SUBSIDIARY GUARANTORS listed herein, the BANKS listed on the signature pages hereof, CITIGROUP GLOBAL MARKETS INC., as Lead Arranger and Book Runner, BANC OF AMERICA SECURITIES LLC, as Lead Arranger and Book Runner and as Co-Syndication Agent, DEUTSCHE BANK SECURITIES INC, as Lead Arranger and Book Runner, UNION BANK OF CALIFORNIA, N.A., as Co-Syndication Agent and as Lead Arranger and Book Runner and as Syndication Agent, LEHMAN COMMERCIAL PAPER INC., as Co-Documentation Agent, UBS SECURITIES LLC, as Co-Documentation Agent, SOCIÉTÉ GÉNÉRALE, as Co-Documentation Agent, CREDIT LYONNAIS NEW YORK BRANCH, as Co-Documentation Agent, CITICORP USA, INC., as Administrative Agent for the Bank Parties and CITIBANK, N.A., as Collateral Agent for the Bank Parties.

Date		Item Reported On
February 5, 2004		Items 12 and 5— disclosure of the Company’s financial results for the year ended December 31, 2003.

~~July 2, 2003~~February 13, 2004		~~Item~~Items 5 – Disclosure relating to the status of discussion on the restructuring proposal for the Registrant’s subsidiary, AES Drax Holdings Limited, including the Form 6-K relating to the same matter filed by AES Drax Holdings Limited.
~~July 30, 2003~~		~~Item 12 – Disclosure of the Company’s second-quarter earnings.~~
~~August~~and 7 ~~2003~~		~~Item 9 – Disclosure~~— disclosure relating to the Company’s ~~withdrawal of support for Drax restructuring including~~filing the Form ~~6-K relating to the same matter filed by the Company’s subsidiary,~~of Tenth Supplemental Indenture between The AES ~~Drax Holdings Limited.~~
~~August 15, 2003~~		~~Item 5 – Disclosure of certain recent developments at the Company’s subsidiaries, Eletropaulo, AES Sul~~Corporation and ~~AES Cayman Guaiba.~~Wells Fargo Bank Minnesota, N. A.

	~~THE~~The AES ~~CORPORATION~~Corporation
	(Registrant)


Date: May 10, 2004	By:	/s/ Barry J. Sharp
~~Date: November 13, 2003~~	~~By:~~	Name: Barry J. Sharp
		Title: Executive Vice President and Chief Financial Officer

Exhibit	Description of Exhibit	Sequentially Numbered Page

31.1	Certification of principal executive officer required by Rule 13a-14(a) of the Exchange ~~Act~~Act.

31.2	Certification of principal financial officer required by Rule 13a-14(a) of the Exchange ~~Act~~Act.

32.1	Certification of principal executive officer and principal financial officer required by Rule 13a-14(b) or 15d-14(b) of the Exchange ~~Act~~Act.

10.1	THIRD AMENDED AND RESTATED CREDIT AND REIMBURSEMENT AGREEMENT dated as of March 17, 2004 among THE AES CORPORATION, a Delaware corporation , the SUBSIDIARY GUARANTORS listed herein, the BANKS listed on the signature pages hereof, CITIGROUP GLOBAL MARKETS INC., as Lead Arranger and Book Runner, BANC OF AMERICA SECURITIES LLC, as Lead Arranger and Book Runner and as Co-Syndication Agent, DEUTSCHE BANK SECURITIES INC, as Lead Arranger and Book Runner, UNION BANK OF CALIFORNIA, N.A., as Co-Syndication Agent and as Lead Arranger and Book Runner and as Syndication Agent,LEHMAN COMMERCIAL PAPER INC.,as Co-Documentation Agent, UBS SECURITIES LLC, as Co-Documentation Agent, SOCIÉTÉ GÉNÉRALE, as Co-Documentation Agent, CREDIT LYONNAIS NEW YORK BRANCH, as Co-Documentation Agent, CITICORP USA, INC., as Administrative Agent for the Bank Parties and CITIBANK, N.A., as Collateral Agent for the Bank Parties.