RESULTS OF OPERATIONS

Generation. Traditionally, most of AES's generation plants have sold electricity under long-term power sales agreements to electric utilities or state-owned power companies. Generated electricity is sold under a two part pricing method, representing the two main products, capacity and energy, produced by electric generating facilities. Energy refers to the sale of the actual electricity produced by the plant and capacity refers to the amount of generation reserved for a particular customer, irrespective of the amount of energy actually purchased. Most of the Company's generating businesses (based upon revenues) are structured so that each power plant generally relies on one power sales contract with a single electric customer for the majority, if not all, of its 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. The Company has sought to reduce this risk, where possible, by entering into power sales contracts with customers who have their debt or preferred securities rated "investment grade", or by obtaining sovereign government guarantees of the purchaser's obligations, as well as by locating its plants in different geographic areas in order to mitigate the effects of regional economic downturns.
          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 their payment obligations. Moreover collection of receivables may be hindered in these countries due to ineffective systems for adjudicating contract disputes.
          At some generation plants, all or a portion of the electricity sales are not sold pursuant to a long-term contract and are sold into the short-term contract or spot electricity markets. The prices paid for electricity in the spot markets can be, and from time to time, have been unpredictable and volatile. Electricity price volatility often exists in those regions in the United States and other parts of the world that are introducing competitive energy markets and where periods of temporary shortage of or excess supply of electricity occur. This volatility is influenced by peak demand requirements, weather conditions, competition, electricity transmission constraints and fuel prices, as well as plant availability and other relevant factors. The majority of the electricity generated at the New York plants and a significant portion of the Drax plant and the generation businesses in Argentina is sold into power pools or under short-term contracts (or in case of the Drax plant subject to the provisions of contractual instruments that have the effect of

Distribution. In the United States, the Company participates in certain competitive retail electricity supply markets, where state laws permit, by selling electricity to end users. In these markets, the Company typically enters into one to three year electricity supply contracts with its customers. These contracts may be structured as shared savings arrangements, fixed savings arrangements or fixed price supply contracts. In certain of its fixed savings arrangements and fixed price supply contracts, the cost to supply electricity to the customer may be greater than the price the customer is required to pay the Company. The Company also engages in wholesale purchases and sales of electricity to support its electricity sales to end users. AES also owns and operates an integrated distribution company, CILCORP, that serves approximately 193,000 electric and 202,000 gas customers in Central Illinois under existing state regulatory provisions that provide for the transition to a competitive market. Under these provisions, CILCORP's return on equity is subject to regulation by the Illinois state regulatory authorities.
          Outside of the United States, retail electricity sales by AES's distribution businesses are made pursuant to provisions of long-term electricity sales concession agreements ranging in remaining length from 17 to 92 years. Each business is generally authorized to charge its customers a tariff for electric services that consists of two components: an energy expense pass-through component and an operating cost component. Both components are established as part of the original grant of the con- cession for certain initial periods (ranging from four to eight years remaining). Beginning subsequent to the initial periods, and at regular intervals thereafter, the concession grantor has the authority to review the costs of the relevant business to determine the inflation adjustment (or other similar adjustment factor), if any, to the operating cost component (the "Adjustment Escalator") for the subsequent regular interval. This review can result in an Adjustment Escalator that has a positive, zero or negative value. This electricity market structure is often referred to as "price-cap" regulation, because the investors rate of return on its equity is not directly subject to regulation. To date, the Company has not reached the end of the initial tariff periods in any of its distribution businesses. As a result, there can be no assurance as to the effects, if any, on its future