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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

COMMISSION FILE NUMBER 0-19281

The AES Corporation
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (703) 522-1315

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

        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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        The aggregate market value of Registrant's voting stock held by non-affiliates of Registrant, at March 2, 2002, was $2,661,751,402. The number of shares outstanding of Registrant's Common Stock, par value $0.01 per share, at March 2, 2002, was 534,019,090.

DOCUMENTS INCORPORATED BY REFERENCE

        The Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be held on April 25, 2002 is hereby incorporated by reference. Certain information therein is incorporated by reference into Part III hereof.

PART I

ITEM 1—BUSINESS

(a) General Development of Business.

Overview

        The AES Corporation (including all its subsidiaries and affiliates, and collectively referred to herein as "AES" or the "Company" or "we") is a global power company committed to serving the world's needs for electricity in a socially responsible way. AES's total megawatts ("MW") in the 179 power plants in operation or under construction is approximately 62,852MW and net equity ownership (total MW adjusted for the Company's ownership percentage) represents approximately 50,764MW. AES participates primarily in four lines of business: contract generation, competitive supply, large utilities and growth distribution.

        Contract Generation.    AES's contract generation line of business is made up of multiple power generation facilities located around the world that have contractually limited their exposure to commodity price risks, primarily electricity prices. These facilities limit their exposure to electricity price volatility by entering into long-term (five years or longer) power purchase agreements for 75% or more of their output capacity. Because they have contracted for a majority of their anticipated output, they are able to project their fuel supply requirements and also, generally, enter into long-term agreements for most of their fuel (coal, natural gas or fuel oil or other similar fuel) supply requirements, thereby also limiting their exposure to fuel price volatility. Through these contractual agreements, the businesses generally increase the predictability of their cash flows and earnings. In order to meet AES's definition of its contract generation segment, long-term power purchase agreements have minimum initial durations of five years or longer and are typically entered into with one major customer, but may also be with a series of unrelated customers. In addition, AES may enter into tolling or "pass through" arrangements whereby the counter party directly assumes the risks associated with providing the necessary fuel and marketing the resulting power output generated. AES currently has 60 contract generation facilities in operation totaling 21,590 Gross MW and seven facilities under construction for an additional 3,388MW located in six different countries. The operating facilities have an average of 13 years remaining on their power purchase agreements and are located in 19 different countries, including 27% (5,843MW) in North America, 26% (5,704MW) in South America, 25% (5,349MW) in Asia, 16% (3,413MW) in Europe/Africa, and 6% (1,281MW) in the Caribbean. Customer types include private utilities, governments and commercial electric trading companies. AES's contract generation business represented approximately 30% of pre-tax segment income and 27% of total revenues in 2001 compared to 31% and 23%, respectively in 2000.

        Competitive Supply.    AES's competitive supply line of business is oriented around the customer perspective and consists of generating facilities and retail supply businesses that sell electricity directly to wholesale and retail 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. The prices paid for electricity under short-term contracts and in the spot markets can be, and from time to time have been, unpredictable and volatile. The results of operations of AES's competitive supply business is also more sensitive to the impact of market fluctuations in the price of electricity, natural gas, coal and other raw materials. This line of business includes generating facilities located around the world and the New Energy group of companies, which market electricity to commercial and industrial customers in those states in the U.S. that have introduced a competitive market for the sale of electricity to end users and in the U.K. The generating facilities included in this line of business represent 19,713 Gross MW in 8 different countries, including 42% (8,414MW) in Asia, 28% (5,476MW) in Europe/Africa, 14% (2,730MW) in South America, 9% (1,721MW) in North America and 7% (1,372MW) in the Caribbean. In addition,

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AES is also currently in the process of adding approximately 4,121MW to its competitive operating supply portfolio. This line of business represented approximately 9% of pre-tax segment income and 29% of total revenues in 2001 compared to 21% and 32%, respectively in 2000.

        Large Utilities.    AES's large utility business is comprised of five integrated utilities located in the U.S. (IPALCO and CILCORP), Brazil (Eletropaulo Metropolitana ("Eletropaulo") and Companhia Energetica de Minas Gerias ("CEMIG")) and Venezuela (C.A. La Electricidad de Caracas ("EDC")). AES's equity interest in each of these utilities is over 70% other than CEMIG in which AES's equity interest is approximately 21%. As of December 31, 2001, AES also owned a minority interest in a sixth utility, Light-Servicos de Electricidade S.A. ("Light"), which was exchanged in February 2002 for an additional ownership interest in Eletropaulo. All of these utilities are of significant size, and all but CILCORP maintain a monopoly franchise within a defined service area. In most cases large utilities combine generation, transmission and distribution capabilities. Large utilities are subject to extensive local, state and national regulation relating to ownership, marketing, delivery and pricing of electricity and gas with a focus on protecting customers. Large utility revenues result primarily from electricity sales to customers under tariff or concession agreements and to a lesser extent from contractual agreements of varying lengths and provisions. AES's large utilities, including IPALCO (3,036MW), CILCORP (1,157MW), Light (793MW), EDC (2,265MW) and CEMIG (5,668MW), aggregate 12,919 Gross MW of generation capacity and serve over thirteen million customers with annual sales of nearly 120,000 gigawatt hours. AES's large utility business represented approximately 51% of pre-tax segment income and 26% of total revenues in 2001 compared to 46% and 28%, respectively in 2000.

        Growth Distribution.    AES's growth distribution line of business includes distribution facilities that offer significant potential for growth because they are located in developing countries or regions where the demand for electricity is expected to grow at a higher rate than in more developed areas. However, these businesses face particular challenges relating to operational difficulties such as outdated equipment, significant non-technical or theft related losses, cultural problems associated with safety and non-payment, emerging economies as well as potentially less stable governments or regulatory regimes. Often however, the conditions of the business environment in a developing nation also provide for significant opportunities to implement operating improvements that may stimulate growth in earnings and cash flow performance at rates greater than those typically achievable in AES's large utility segment. Distribution facilities included in this line of business may include integrated generation, transmission, distribution or related services companies. AES's growth distribution business represented approximately 10% of pre-tax segment income and 18% of total revenues in 2001 compared to 2% and 17%, respectively in 2000. The facilities currently in this line of business represent 800 Gross MW of integrated generation and serve approximately 5.4 million customers with sales exceeding 30,844 gigawatt hours in Argentina, Brazil, Cameroon, Dominican Republic, El Salvador, Georgia, Kazakhstan and Ukraine.

        Reorganization.    The Company has recently completed a reorganization to enhance operating performance, including further reductions of operating costs and revenue enhancements. This reorganization has included the creation of four Chief Operating Officer positions who, together with the CEO, constitute the Executive Office. Each COO is directly responsible for managing a portion of the Company's geographically dispersed businesses as well as coordinating Company wide efforts associated with one of the Company's business segments. In addition, two special offices, the Cost Cutting Office and the Turnaround Office, have been created to bring improved focus and coordination to the management of expenses across the Company and to improve or dispose of businesses that AES believes to be under-performing businesses from a return on capital perspective, respectively. Each of these offices reports to the Executive Office. Several additional efforts are being undertaken to respond to the current condition of the electricity and capital markets and their impacts on AES businesses, however, there can be no assurance that the initiatives described above or any others that are being, or may be, taken will have the anticipated positive effect.

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        The Company, a corporation organized under the laws of Delaware, was formed in 1981. AES has its principal offices located at 1001 North 19th Street, Suite 2000, Arlington, Virginia 22209. Its telephone number is (703) 522-1315, and its web address is http://www.aesc.com. The Company currently employs approximately 38,000 people worldwide.

Cautionary Statements and Risk Factors

        The Company wishes to caution readers that the following important factors, among others, indicate areas affecting the Company, which involve risk and uncertainty. These factors should be considered when reviewing the Company's business, and are relied upon by AES in issuing any forward-looking statements. Such factors could affect AES's actual results and cause such results to differ materially from those expressed in any forward looking statements made by, or on behalf of, AES. Some or all of these factors may apply to the Company's businesses as currently maintained or to be maintained.

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The inability to raise capital on favorable terms, to refinance existing short-term corporate or subsidiary indebtedness or to fund operations, future acquisitions, construction of new plants (known as "greenfield development") and other capital commitments, particularly during times of uncertainty in the capital markets and in those areas of the world where the capital and bank markets are underdeveloped.



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Changes in operation and availability of the Company's generating plants (including wholly and partially owned facilities) compared to the Company's historical performance; changes in the Company's historical operating cost structure, including but not limited to those costs associated with fuel, operations, supplies, raw materials, maintenance and repair, people, environmental compliance, including the costs of required emission offsets, purchase and transmission of electricity and insurance; changes in the availability of fuel, supplies, raw materials, emission offsets, transmission access and insurance; changes or increases in planned or unplanned capital expenditures or other maintenance activities, including but not limited to expenditures relating to environmental emission equipment, changes in law or regulation, sudden mechanical failure, or acts of God.



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Failure by the Company to achieve significant operating improvements and cost reductions in many of its distribution businesses; changes in the historical or expected cost structure of its distribution businesses, including unexpected increases in planned or unplanned capital expenditures or other maintenance activities; inability to predict, influence or respond appropriately to changes in law or regulatory schemes; inability to obtain redress from regulatory authorities.



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Inability to obtain expected or contracted changes in electricity tariff rates or tariff adjustments for increased expenses, changes in the underlying foreign currency exchange rates or unexpected changes in those rates or adjustments; the ability or inability of AES to obtain, or hedge against, in an economical manner, foreign currency; foreign currency exchange rates and fluctuations in those rates; local inflation and monetary fluctuations; import and other charges or taxes; conditions or restrictions impairing repatriation of earnings or other cash flow; the economic, political and military conditions affecting property damage, interruption of business and expropriation risks; changes in trade, monetary and fiscal policies, laws and regulations; unwillingness of governments to honor contracts or other activities of governments, agencies, government-owned entities and similar organizations; development progress and other social and economic conditions; inability to obtain access to fair and equitable political, regulatory, administrative and legal systems, enforcement of judgments or a just result; nationalizations and unstable governments and legal systems, and intergovernmental disputes; inability to protect the Company's rights and assets due to dysfunctional, corrupt or ineffective administrative or legal systems.

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In certain jurisdictions where the Company's electricity tariffs are subject to regulatory review or approval, changes in the application or interpretation of regulatory provisions including, but not limited to, changes in the determination, definition or classification of costs to be included as reimbursable or pass-through costs, changes arising from changes in the underlying foreign currency exchange rates, changes in the definition or determination of controllable or non-controllable costs, changes in the definition of events which may or may not qualify as changes in economic equilibrium, changes in the timing of tariff increases or other changes in the regulatory determinations under the relevant concessions, state or federal regulatory provisions; unwillingness of regulatory bodies to take required actions, retrenchment or delay in taking action.



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Changes in the amount of, and rate of growth in, AES's selling, general and administrative expenses; the impact of AES's ongoing evaluation of its development costs, business strategies and asset valuations, including, but not limited to, the effect of a failure to successfully complete certain acquisition, construction or development projects.



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Legislation intended to promote competition in U.S. and non-U.S. electricity markets, including the effects of such legislation upon existing contracts, such as: (i) The New Energy Trading Arrangements ("NETA") in the United Kingdom (see also the description of the AES Drax facility under Regulatory Outlook for related matters); (ii) legislation currently receiving serious consideration in the United States Congress to repeal (a) the Public Utility Regulatory Policies Act of 1978, as amended, or at least to repeal the obligation of utilities to purchase electricity from qualifying facilities, and (b) the Public Utility Holding Company Act of 1935, as amended; (iii) changes in regulatory rule-making by the Securities and Exchange Commission, the Federal Energy Regulatory Commission or other regulatory bodies; (iv) changes in energy taxes; (v) new legislative or regulatory initiatives in U.S. and non-U.S. countries; and (vi) changes in national, state or local energy, environmental, safety, tax and other laws and regulations applicable to the Company or its operations.



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A reversal or continued slowdown of the trend toward electricity industry deregulation in the various markets that the Company is conducting or is seeking to conduct business.



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The prolonged failure by any significant customer of the Company or any of its subsidiaries to fulfill its contractual payment obligations presently or in the future, either because such customer is financially unable to fulfill such contractual obligation or otherwise refuses to do so.



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Successful and timely completion of (i) the respective construction of each of the Company's electric generating projects now under construction and those projects yet-to-begin construction or (ii) capital improvements to existing facilities.



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Successful and timely completion of pending and future acquisitions; conducting appropriate due diligence; assumptions regarding the performance of countries, markets, and models.



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The effects of a strengthening dollar against foreign currencies; the lack of portability of products and services produced by the company's power plants and distribution companies beyond the local markets where such products or services are produced; failure by the Company to include dollar indexation and other protective provisions in contracts or through third party hedging mechanisms, or the refusal of contracting parties to abide by such provisions when included.



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The effects of a worldwide depression, recession or economic downturn; prolonged economic crisis in countries, states or regions where the Company conducts, or is seeking to conduct, its business; political, economic and market instability related to or resulting from economic crisis and the related collateral effects, including, but not limited to, riots, looting, destruction of property, terrorism and civil war.

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Changes and volatility in inflation, fuel, electricity and other commodity prices in U.S. and non-U.S. markets; conditions in financial markets, including fluctuations in interest rates and the availability of capital; temporary or prolonged over/under supply in key markets and changes in the economic and electricity consumption growth rates in the United States and non-U.S. countries.



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Adverse weather conditions and the specific needs of each plant to perform unanticipated facility maintenance or repairs or outages (including annual or multi-year), or to install pollution control equipment or other environmental emission equipment.



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The costs and other effects of legal and administrative cases, arbitrations or proceedings, settlements and investigations, claims (including insurance claims for losses suffered), and changes in those items, developments or assertions by or against AES; the effect of new, or changes in, accounting policies and practices and the application of such policies and practices.



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Changes or increases in taxes on property, plant, equipment, emissions, gross receipts, income or other aspects of the Company's business or operations; investigation or reversal of the Company's tax positions by the IRS.

(b) Financial Information About Industry Segments And Geographic Areas

        The Company operates in four business segments: contract generation, competitive supply, large utilities and growth distribution. See Note 16 to the Consolidated Financial Statements included in Item 8 herein for financial information about those segments.

(c) Narrative Description of Business.

        AES is a global power company committed to serving the world's needs for electricity in a socially responsible way. AES is comprised of four lines of business: contract generation, competitive supply, large utilities, and growth distribution. The contract generation segment includes generating plants that have entered into contracts with initial durations of 5 years or greater accounting for at least 75% of their estimated revenue stream. The competitive supply segment includes both wholesale (through generation facilities with shorter-term market-priced contracts) and retail sales of electricity directly to end users such as commercial, industrial, governmental and residential customers. The large utility segment is characterized by distribution businesses of significant size that often combine generation, transmission and distribution capabilities and are subject to extensive local, state and national regulation. The growth distribution segment includes distribution facilities facing particular challenges relating to operational difficulties that are located in emerging markets and offer significant potential for improved financial and operational performance.

        Through each of its four business lines, the Company attempts to participate in both regulated and competitive power markets through either greenfield development or by acquiring and operating existing facilities or companies. Elements of the Company's strategy include:

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Supplying energy to customers at the lowest cost possible, taking into account factors such as reliability and environmental performance;



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Constructing, acquiring and operating projects of a relatively large size in geographically dispersed markets;



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To the extent available, maximizing the amount of non-recourse financing;



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When available, entering into longer-term power sales contracts or other arrangements with electric utilities or other customers with significant credit strength;

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Where possible, participating in distribution markets that grant concessions with long-term pricing arrangements; and



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When available, entering into hedging, indexing or other arrangements to protect against fluctuations in currency, fuel costs and electricity prices.

        The Company also strives for operating excellence as a key element of its strategy, which it believes it accomplishes by minimizing organizational layers and maximizing company-wide participation in decision making. AES has attempted to create an operating environment that results in safe, clean and reliable electricity generation, distribution and supply. Because of this emphasis, the Company prefers to operate all facilities and businesses which it develops or acquires; however, there can be no assurance that the Company will have operating control of all of its facilities.

        The Company attempts to finance each domestic and foreign project primarily under loan agreements and related documents which, except as noted below, require the loans to be repaid solely from the project's revenues and provide that the repayment of the loans (and interest thereon) is secured solely by the capital stock, physical assets, contracts and cash flow of that project subsidiary or affiliate. This type of financing is usually referred to as non-recourse debt or "project financing." The lenders under these project financing structures generally do not have recourse to AES, the parent company, or its other projects for repayment, unless such entity explicitly agrees to undertake liability. AES has explicitly agreed to undertake certain limited obligations and contingent liabilities, most of which by their terms will only be effective or will be terminated upon the occurrence of future events. These obligations and liabilities take the form of guarantees, indemnities, letter of credit reimbursement agreements, and agreements to pay, in certain circumstances, to project lenders or other parties. To the extent AES becomes liable under guarantees and letter of credit reimbursement agreements, distributions received by AES from other projects are subject to the possibility of being utilized by AES to satisfy these obligations. To the extent of these obligations, the lenders to a project effectively have recourse to AES and to the distributions to AES from other projects. The aggregate contractual liability of AES is, in each case, usually a small portion of the aggregate project debt, and thus the project financing structures are generally described herein as being "substantially non-recourse" to AES and its other projects.

        AES has also hedged a substantial portion of its projects against the risk of fluctuations in interest rates. In each project with fixed capacity payments, AES has attempted to hedge all or a significant portion of its risk of interest rate fluctuations by arranging for fixed-rate financing or variable-rate financing with interest rate swaps or other hedging mechanisms.

        Contract Generation.    AES's contract generation line of business is made up of multiple power generation facilities located around the world that have contractually limited their exposure to commodity price risks, primarily electricity prices. These facilities limit their exposure to electricity price volatility by entering into long-term (five years or longer) power purchase agreements for 75% or more of their output capacity. Because they have contracted for a majority of their anticipated output, they are able to project their fuel supply requirements and also generally enter into long-term agreements for most of their fuel (coal, natural gas, fuel oil or other similar fuel) supply requirements, thereby limiting their exposure to fuel price volatility. Through these contractual agreements, the businesses generally increase the predictability of their cash flows and earnings. In order to meet AES's definition of its contract generation segment, long-term power purchase agreements have a minimum duration of five years or longer and are typically entered into with one major customer, but may also be with a series of unrelated customers. In addition, AES may enter into tolling or "pass-through" arrangements whereby the counter-party assumes the risks associated with providing the necessary fuel and marketing the resulting power output generated. AES's contract generation business represented approximately 30% of pre-tax segment income and 27% of total revenues in 2001 compared to 31% and 23%, respectively in 2000.

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        AES currently has 60 contract generation facilities in operation totaling 21,590 Gross MW. The operating facilities have an average of 13 years remaining on their sales contracts and are located in 19 different countries, including 27% (5,843MW) in North America, 26% (5,704MW) in South America, 25% (5,349MW) in Asia, 16% (3,413MW) in Europe/Africa, and 6% (1,281MW) in the Caribbean. Customer types include private utilities, governments and commercial electric trading companies. AES is also currently in the process of adding approximately 3,388MW in six different countries to its contract generation operating portfolio through its greenfield development. These include a 832MW natural gas-fired plant in the United States, a 454MW coal-fired plant in Puerto Rico, a 310MW natural gas-fired plant in the Dominican Republic, a 450MW natural gas-fired plant in Bangladesh, a 427MW natural gas-fired plant in Oman, a 750MW natural gas-fired plant in Qatar and a 165MW natural gas-fired plant in Sri Lanka.

        Typically, AES enters into long-term power purchase agreements or tolling agreements with electric utilities, power marketing firms and state-owned power companies. Although the specific terms of individual sales contracts may vary significantly, power purchase agreements or other similar arrangements for the sale of electricity (including tolling agreements or financially settled hedging agreements) generally contain pricing provisions that reflect the two principal products, capacity and energy, produced by electric generating facilities. Energy refers to the sale of the actual electricity produced by the generation facility and capacity refers to the amount of generation reserved for a particular customer, irrespective of the amount of energy actually purchased.

        To the extent possible, the Company attempts to structure its power generation facilities' fuel supply contracts so that fuel costs are indexed in a manner similar to the energy payments a project receives under its power purchase agreement. In this way, project revenues are partially or completely hedged against fluctuations in fuel costs. However, there can be no guarantee that such arrangements will be available or, if available, will be an effective hedge.

        A significant portion of AES's contract generating business is comprised of agreements whereby a single customer contracts for the majority, if not all, of a given power generation facility's revenues. The prolonged failure of any significant customer to fulfill its contractual payment obligations in the future could have a substantial negative impact on AES's results of operations and financial condition. AES has sought to reduce this risk, where possible, by contracting with customers who have their debt or preferred securities rated "investment grade," or by obtaining sovereign government guarantees of the customer's obligations. However, AES does not limit its business solely to the most developed countries or economies, nor even to those countries with investment grade sovereign credit ratings. In certain locations, particularly in developing countries or countries that are in a transition from centrally planned to market oriented economies, the electricity purchasers, both wholesale and retail, may be unable or unwilling to honor all of their contractual payment obligations. Moreover, collection of receivables may be hindered in some countries due to ineffective systems for adjudicating contract disputes. In order to minimize the risk of contract abrogation, AES maintains flexibility with its customers. In many instances, AES is able to avoid abrogation by creatively restructuring contracts without disadvantaging itself. Where this is not possible, AES diligently pursues resolution through litigation or contractually prescribed arbitration. AES believes that locating its plants in different geographic areas helps to mitigate the effects of regional economic downturns, thereby in part mitigating a portion of the risks imposed by operating in less developed countries.

        Because the stability of revenues for each power generation facility is dependent upon the predictability and containment of costs of operation, utilization of low-cost technology, selection of favorable sites and availability of quality fuel and permits contributes to the success of the contract generation business. AES seeks to enter into "turnkey" engineering contracts for each power generation facility it develops. Turnkey contracts allow AES to more reliably establish the total cost of construction and development and to delegate the majority of the construction responsibilities thereby

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eliminating a significant portion of the cost uncertainties otherwise inherent in new power plant development.

        Competitive Supply.    AES's competitive supply line of business is oriented around the customer perspective and consists of generating facilities and retail supply businesses that sell electricity directly to wholesale and retail 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. The generating facilities included in this line of business represent 19,713 Gross MW in 8 different countries, including 42% (8,414MW) in Asia, 28% (5,476MW) in Europe/Africa, 14% (2,730MW) in South America, 9% (1,721MW) in North America and 7% (1,372MW) in the Caribbean. In addition, AES is also currently in the process of adding approximately 4,121MW to its competitive supply operating portfolio through its construction of new plants. These include a 210 MW natural gas-fired plant, a 450 MW natural gas-fired plant, two 720 MW natural gas-fired plants, a 500 MW natural gas-fired plant and a 1,056 MW natural gas-fired plant in the United States, a 123 MW hydroelectric facility in Argentina, two hydroelectric facilities totaling 230MW in Panama, and a 112 MW natural gas-fired plant in Tanzania. In the case of several generating facilities, including Drax, only a portion of the output is subject to the provisions of long term price hedging instruments. This line of business represented approximately 9% of pre-tax segment income and 29% of total revenues in 2001 compared to 21% and 32%, respectively for 2000.

        The retail portion of AES's competitive supply business focuses on providing electricity and energy related products and services to commercial and industrial end users through the New Energy group of companies in the U.K. and in those states in the U.S. that have introduced a competitive market for the sale of electricity to end users, including California, Delaware, Illinois, Maine, Maryland, Massachusetts, New Hampshire, New York, Ohio, Pennsylvania, Rhode Island and Texas. The New Energy group of companies has approximately 2,700 customers. In these markets, AES typically enters into single or multi-year electricity supply contracts with its customers. These contracts may be structured as shared savings arrangements, fixed savings arrangements or fixed price supply contracts. AES also engages in wholesale purchases and sales of electricity to support its retail electricity sales to consumers. The wholesale purchases or sale of electricity often require substantial additional credit support, and this credit support currently is provided to New Energy through (i) Letters of Credit backed by AES, (ii) third parties such as surety companies or (iii) guarantees by AES. AES is currently evaluating whether continuing to provide such credit support for New Energy's business is an appropriate use of its capital resources, and is exploring alternative credit arrangements for New Energy. Such arrangements may include finding a third party credit provider for all of New Energy's credit needs, or a sale of part or all of AES's interest in New Energy.

        In managing supply and price risk, all options for supply are actively considered, including (i) utilizing the output from AES owned generating assets, (ii) building or acquiring additional generating assets and (iii) buying electricity from other generators or marketers. AES permits its wholesale and retail businesses to operate independently without forcing integration, while allowing integration to occur in those instances where it is economically advantageous to AES to do so. The prices paid for electricity under short-term contracts and in the spot markets can be, and from time to time have been, unpredictable and volatile. This volatility is influenced by peak demand requirements, weather conditions, competition, market regulation, interest rate and foreign exchange rate fluctuations, electricity transmission and environmental emission constraints, the availability or prices of emission credits and fuel prices, as well as plant availability and other relevant factors. In addition to exposure to the risks associated with market movement, the competitive supply business is also exposed to credit risk either because such business may be required to establish sufficient credit to support its operations, or because of the potential nonperformance of contractual obligations by a counterparty. AES maintains credit policies with regard to its counterparties, however, there can be no assurance that

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these parties will ultimately be able to pay when called to do so. The absence of long-term contracts can also result in uncertainty relating to future production volumes, which in turn causes uncertainty with respect to the volume of fuel to be consumed to support such production. As a result, the competitive supply business may also be exposed to volume risk in connection with its purchase of natural gas, coal and other raw materials. In the U.S., AES hedges certain aspects of its "net open" positions. AES has used a hedging strategy, where appropriate, to hedge its financial performance against the effects of fluctuations in energy commodity prices. The implementation of this strategy involves the use of commodity forward contracts, futures, swaps and options.

        Large Utilities.    AES's large utility business is comprised of five integrated utilities located in the U.S. (IPALCO and CILCORP), Brazil (Eletropaulo and CEMIG) and Venezuela (EDC). AES's equity interest in each of these utilities is over 70% other than CEMIG in which AES's equity interest is only 21%. As of December 31, 2001, AES also owned a minority interest in a sixth utility, Light, which was exchanged in February 2002 for an additional ownership interest in Eletropaulo. All of these utilities are of significant size, and all but CILCORP maintain a monopoly franchise within a defined service area. In most cases large utilities combine generation, transmission and distribution capabilities. Large utilities are subject to extensive local and national regulation relating to ownership, marketing, delivery and pricing of electricity and gas with a focus on protecting customers. Large utility revenues result primarily from customer tariffs and to a lesser extent from contractual agreements of varying lengths and provisions. AES's large utilities, including IPALCO (3,036MW), CILCORP (1,157MW), Light (793MW), EDC (2,265MW) and CEMIG (5,668MW), aggregate 12,919 Gross MW of generation capacity and serve over thirteen million customers with annual sales of nearly 120,000 gigawatt hours. AES's large utility business represented approximately 51% of pre-tax segment income and 26% of total revenues in 2001 compared to 46% and 28%, respectively in 2000. Large utility revenues result primarily from electricity sales to customers under regulated tariff or concession agreements and to a lesser extent from contractual agreements of varying lengths and provisions.

        IPALCO is a holding company and its principal subsidiary is Indianapolis Power & Light Company, or IPL. IPL is engaged primarily in generating, transmitting, distributing and selling electric energy in the City of Indianapolis and neighboring cities, towns and communities, and adjacent rural areas all within the state of Indiana, primarily in and around Indianapolis. IPL owns and operates two primarily coal-fired generating plants and a separately-sited combustion turbine that are used for electric generation. IPL also operates one coal and gas-fired plant. For electric generation, the total demonstrated net capability is 3,118MW, net winter capability is 3,129MW and net summer capability is 3,036MW.

        CILCORP is a holding company whose principal business subsidiary is Central Illinois Light Company (CILCO). CILCO is engaged in the generation, transmission, distribution and sale of electric energy in an area of approximately 3,700 square miles in central and east-central Illinois, and the purchase, distribution, transportation and sale of natural gas in an area of approximately 4,500 square miles in central and east-central Illinois, where the electricity industry has undergone deregulation. As part of its regulatory approval to acquire IPALCO, AES is required to divest CILCORP, which divestiture process is currently underway.

        Eletropaulo has served the São Paulo area for over 100 years and is the largest electricity distribution company in Latin America in terms of revenues. Eletropaulo's concession contract with the Brazilian regulatory agency ANEEL entitles Eletropaulo to distribute electricity in its service area for 30 years. Eletropaulo's service territory consists of 24 municipalities in the greater São Paulo metropolitan area and adjacent regions and accounts for about 15% of Brazil's GDP, covering 4.7 million customers or about 41% of the population in the State of São Paulo.

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        CEMIG is engaged in electricity generation, transmission and distribution in Minas Gerais State, Brazil. CEMIG operates a distribution network that extends over 270,000 kilometers, the largest in Latin-America, and supplies over 4.5 million customers throughout Minas Gerais State, Brazil.

        EDC was founded in 1895 and is the largest private-sector electric utility in Venezuela serving approximately 1.1 million customers (approximately 20% of the Venezuelan population). EDC generates, transmits and distributes electricity primarily to metropolitan Caracas and its surrounding area. EDC's distribution area covers 5,176 square kilometers. EDC has an installed generating capacity of 2,265MW.

        AES seeks to acquire large utilities that it believes it can successfully restructure by focusing on improving efficiencies to achieve cost savings while providing high quality services to its customers. Each utility employs business personnel with direct contact with its customers.

        AES believes it is important to manage the regulatory frameworks of its large utilities, which are becoming increasingly competitive. As regulated entities, each large utility is subject to extensive local, state and national regulation relating to ownership, marketing, delivery and pricing of electricity and gas with a focus on protecting customers. Regulatory approval must generally be sought for the purchase, acquisition, sale or disposal of these businesses. In some instances, the approval process can broadly affect all of AES's public utility holdings. For example, as mentioned above, the provisions of the regulatory approval for AES's acquisition of IPALCO require AES to relinquish control or dispose of a portion of its regulated assets or businesses in the United States, in particular certain transmission and distribution assets owned by CILCO, a subsidiary of CILCORP, within two years.

        Growth Distribution.    AES's growth distribution line of business includes distribution facilities that offer significant potential for growth because they are 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. Additionally, because these facilities face challenges relating to operational difficulties such as outdated equipment, significant non-technical losses, cultural problems, emerging economies, unstable governments, underdeveloped regulatory regimes or location in a developing nation they allow for operating improvements and financial performance improvements greater than that typically seen in the large utility segment. Distribution facilities included in this line of business may include generation, transmission, distribution or related services companies.

        AES's growth distribution business represented approximately 10% of pre-tax segment income and 18% of total revenues in 2001 compared to 2% and 17%, respectively in 2000. Growth distribution revenues are derived from the distribution and sale of electricity made pursuant to the provisions of long-term electricity sale concessions granted by the appropriate governmental authorities, or in some locations, under existing regulatory laws and provisions. One of our distribution facilities ("SONEL") is "integrated", in that it also owns electric power plants for the purpose of generating a portion of the electricity it sells. The facilities currently in this line of business represent 800 Gross MW of generation and serve over 5.4 million customers with sales exceeding 30,844 gigawatt hours in Argentina, Brazil, Cameroon, Dominican Republic, El Salvador, Georgia and Ukraine.

        AES believes it can leverage its operating expertise, decentralized approach and considerable experience in developing nations to improve the performance of these facilities. There is currently little competition in the growth distribution business. As deregulation and privatization efforts mature and more developing nations seek competitive power providers, the potential size of this market continues to grow and, depending on the rate of progress, may evolve into either a contract generation or competitive supply business or a large utility.

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Principles, Values and Practices

        A core part of AES's corporate culture is a commitment to "shared principles or values." These principles describe how AES people endeavor to commit themselves to the Company's mission of serving the world by providing safe, clean, reliable and low-cost electricity. The principles are:

        Integrity—AES strives to act with integrity, or "wholeness." AES people seek to keep the same moral code at work as at home.

        Fairness—AES wants to treat fairly its people, its customers, its suppliers, its stockholders, governments and the communities in which it operates.

        Fun—AES desires that people employed by the Company and those people with whom the Company interacts have fun in their work. The Company believes that making decisions and being accountable is fun and has structured its organization to maximize the opportunity for fun for as many people as possible.

        Social Responsibility—Primarily, the Company believes that doing a good job at fulfilling its mission is socially responsible. But the Company also believes that it has a responsibility to be involved in projects that provide other social benefits, and consequently has instituted programs such as corporate matching of individual charitable gifts in addition to various local programs conducted by AES businesses.

        AES recognizes that most companies have standards and ethics by which they operate and that business decisions are based, at least in part, on such principles. The Company believes that an explicit commitment to a particular set of standards is a useful way to encourage ownership of those values among its people. While the people at AES acknowledge that they won't always live up to these standards, they believe that being held accountable to these shared values will help them behave more consistently with such principles.

        AES makes an effort to support these principles in ways that acknowledge a strong corporate commitment and encourage people to act accordingly. For example, AES conducts annual surveys, both company-wide and at each business location, designed to measure how well its people are doing in supporting these principles through interactions within the Company and with people outside the Company. These surveys are perhaps most useful in revealing failures, and helping to deal with those failures. AES's principles are relevant because they help explain how AES people approach the Company's business. The Company seeks to adhere to these principles, not as a means to achieve economic success but because adherence is a worthwhile goal in and of itself.

AES Facilities

        The following tables set forth information regarding the Company's facilities that are in operation or under construction at December 31, 2001. For a description of risk factors and additional factors that may apply to the Company's facilities, see also the information contained under the caption "Cautionary Statements and Risk Factors" in Item 1 above, and Item 7, "Discussion and Analysis of Financial Condition and Results of Operations" herein.

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