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THE AES CORPORATION INDEX

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended June 30, 2002

or

Commission file number 0-19281

THE AES CORPORATION
(Exact name of registrant as specified in its charter)

(703) 522-1315
(Registrant's Telephone Number, Including Area Code)

        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

        The number of shares outstanding of Registrant's Common Stock, par value $0.01 per share, at August 1, 2002, was 542,721,411.

THE AES CORPORATION

INDEX

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THE AES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 2002 AND 2001
(Unaudited)

See Notes to Consolidated Financial Statements.

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THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(Unaudited)

See Notes to Consolidated Financial Statements.

4

THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 2002 AND 2001
(Unaudited)

See Notes to Consolidated Financial Statements.

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THE AES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(unaudited)

1.    Basis of Presentation

        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. The revenues and cost of sales of our large utilities and growth distribution segments are reported as regulated, and the revenues and cost of sales of our contract generation and competitive supply segments are reported as non-regulated.

        In the Company's opinion, all adjustments necessary for a fair presentation of the unaudited results of operations for the six months ended June 30, 2002 and 2001, respectively, are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for the period ended June 30, 2002 are not necessarily indicative of the results of operations to be expected for the full year. The accompanying financial statements are unaudited and should be read in conjunction with the financial statements, which are incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

        Certain reclassifications have been made to prior-period amounts to conform to the 2002 presentation.

2.    Foreign Currency Translation

        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 section of the balance sheet. See Note 10 for the amount of foreign currency translation adjustments recorded during the three and six months ended June 30, 2002 and 2001. 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 2001, Argentina began experiencing a significant political, social and economic crisis that has resulted in significant changes in general economic policies and regulations as well as specific changes in the energy sector. In January and February 2002, many new economic measures were adopted by the Argentine Government, including abandoning the country's fixed dollar-to-peso exchange rate, converting U.S. Dollar denominated loans into pesos and placing restrictions on the convertibility of the Argentine peso. The Government has also adopted new regulations in the energy sector that have the effect of repealing U.S. Dollar denominated pricing under electricity tariffs as prescribed in existing electricity distribution concessions in Argentina by fixing all prices to consumers in pesos. Due to the changes, the Company changed the functional currency for its businesses in Argentina to the Peso. The Argentine Peso has experienced a significant devaluation relative to the U.S. Dollar during both the three months and the six months ended June 30, 2002. The Company

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recorded foreign currency transaction losses on its U.S. Dollar denominated debt in the second quarter of 2002 of approximately $52 million after income taxes, or $0.10 per share, representing a decline in the Argentine Peso to U.S. Dollar exchange rate from 2.85 at March 31, 2002 to 3.82 at June 30, 2002. During the six months ended June 30, 2002, the Company recorded foreign currency transaction losses of approximately $134 million after income taxes, or $0.25 per share, representing a decline in the Argentine Peso to the U.S. Dollar from 1.65 used at December 31, 2001 to 3.82 at June 30, 2002. In Argentina, the Company has total investments (including retained earnings) in growth distribution businesses of $323 million and in competitive supply businesses of $475 million.

        During the second quarter of 2002, the Brazilian Real experienced a significant devaluation relative to the U.S. Dollar, declining from 2.32 at March 31, 2002 to 2.84 at June 30, 2002. This devaluation resulted in foreign currency transaction losses at the Brazilian businesses primarily related to U.S. Dollar denominated debt of approximately $85 million after income taxes, or $0.16 per share for the quarter. Similarly during the first six months of 2001, the Brazilian Real experienced a significant devaluation declining from 1.96 at December 31, 2000 to 2.31 at June 30, 2001. The Company recorded non-cash transaction losses of approximately $106 million after income taxes, or $0.20 per share, for the six months ended June 30, 2001. The Brazilian Real continued to devalue subsequent to June 30, 2002.

        During 2002, the Venezuelan economy experienced rising inflation and unemployment rates caused by the decline in oil prices and as a result the Venezuelan Bolivar has experienced significant devaluation relative to the U.S. Dollar during both the three and six months ended June 30, 2002. The Company recorded total foreign currency transaction gains in the second quarter of 2002 of approximately $62 million after income taxes, or $0.12 per share, of which $37 million after income taxes, related to a foreign currency forward contract, which represents a decline in the Venezuelan Bolivar to the U.S. Dollar exchange rate from 906 at March 31, 2002 to 1353 at June 30, 2002. During the six months ended June 30, 2002, the Company recorded foreign currency transaction gains of approximately $127 million after income taxes, or $0.24 per share, of which $37 million after income taxes related to a foreign currency forward contract, which represents a decline in the Venezuelan Bolivar to the U.S. Dollar exchange rate from 758 at December 31, 2001 to 1353 at June 30, 2002. EDC uses the U.S. Dollar as its functional currency. A portion of its debt is denominated in the Venezuelan Bolivar and as of June 30, 2002 has net Venezuelan Bolivar monetary liabilities thereby creating the foreign currency gains when the Venezuelan Bolivar devalues.

3.    Earnings Per Share

        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

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method or the if-converted method, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" (in millions, except per share amounts).

        There were approximately 28,046,407 and 2,144,197 options outstanding at June 30, 2002 and 2001, respectively, that were omitted from the earnings per share calculation for the three months ended June 30, 2002 and 2001 because they were antidilutive.

        There were approximately 27,540,482 and 1,720,841 options outstanding at June 30, 2002 and 2001, respectively, that were omitted from the earnings per share calculation for the six months ended June 30, 2002 and 2001 because they were antidilutive.

        Total options outstanding at June 30, 2002 and June 30, 2001 were 32,792,419 and 16,487,232, respectively.

4.    Discontinued Operations

        In April 2002, AES reached an agreement to sell 100 percent 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 (which was approximately $933 million at June 30, 2002). The transaction also includes an agreement to sell AES Medina Valley Cogen, a gas-fired cogeneration facility located in CILCO's service territory. The transaction is expected to generate gross proceeds of $540 million, subject to certain closing adjustments. The sale of CILCORP by AES was required under the Public Utility Holding Company Act (PUHCA) when AES purchased IPALCO, a regulated utility in Indianapolis, Indiana in March 2001. The transaction is expected to close by the first quarter of 2003. CILCORP was previously reported in the large utilities segment.

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        In June 2002, AES reached an agreement to sell 100 percent of its ownership interest in AES New Energy to Constellation Energy Group for approximately $240 million, subject to certain closing adjustments which approximates the book value of the Company's investment in the business. The transaction is expected to close in the second half of 2002. AES New Energy was previously reported in the competitive supply segment.

        During the second quarter of 2002, after exploring several strategic options related to Eletronet, a telecommunication business in Brazil, AES committed to a plan to sell its 51% ownership interest in this business. The estimated realizable value is less than the book value of AES's investment and as a result, the investment in Eletronet was written down to its estimated realizable value. The write-off is included in the discontinued operations line in the accompanying consolidated statement of operations and was approximately $163 million, net of income taxes. Eletronet was previously reported in the competitive supply segment.

        As a result of a significant reduction in electricity prices in Great Britain during the first quarter of 2002, operating revenues at the Company's Fifoots Point subsidiary were insufficient to cover operating expenses and debt service costs. Accordingly, the subsidiary was placed in administrative receivership by its project financing lenders and the Company's ownership of the subsidiary was terminiated. This resulted in a write-off of the Company's investment of $33 million, net of income taxes. The Company has no continuing involvement in the Fifoots Point subsidiary which was previously reported in the competitive supply segment.

        All of the business components discussed above are classified as discontinued operations in the accompanying consolidated statement of operations. The revenues associated with discontinued operations were $486 million and $338 million for the three months ended June 30, 2002 and 2001, respectively and $968 million and $780 million for the six months ended June 30, 2002 and 2001, respectively. The pretax income from operations associated with discontinued operations was $32 million and $31 million for the three months ended June 30, 2002 and 2001, respectively and $49 million and $39 million for the six months ended June 30, 2002 and 2001, respectively. The loss on disposal/write-down reported in discontinued operations was $170 million and $202 million, net of income taxes, for the three and six months ended June 30, 2002, respectively.

5.    Swap of Owner