SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT

                       PURSUANT TO SECTION 13 OR 15 (D) OF

                       THE SECURITIES EXCHANGE ACT OF 1934

       Date of Report (date of earliest event reported): November 6, 1997

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

       DELAWARE                   333-15487                    54-1163725
     (State  of               (Commission File No.)           (IRS Employer 
    Incorporation)                                         Identification No.)

                       1001 North 19th Street, Suite 2000
                            Arlington, Virginia 22209
          (Address of principal executive offices, including zip code)

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

                                 NOT APPLICABLE

          (Former Name or Former Address, if changed since last report)


<PAGE>


Item  5.  OTHER EVENTS


          This  current  report on Form 8-k includes  The AES  Corporation  1996
          consolidated  financial  statements  updated  for  certain  subsequent
          events  filed  under Item 7, together with the  Independent  Auditors'
          Report on the financial statements.


Item  7.  FINANCIAL STATEMENTS & EXHIBITS

         a. (ii)  The Company's  consolidated  balance sheets as of December 31,
                  1996   and 1995,  and the related  consolidated  statements of
                  operations  and cash flows for the three years ended  December
                  31, 1996, 1995 and 1994, and related notes thereto.


<PAGE>


                          Independent Auditors' Report



   
To the Stockholders
of The AES Corporation:
    


We  have  audited  the  accompanying  consolidated  balance  sheets  of The  AES
Corporation  and  subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations and cash flows for each of the three years
in the period ended  December  31,  1996.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material   respects,   the  financial   position  of  The  AES  Corporation  and
subsidiaries at December 31, 1996 and 1995, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1996 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP


   
Washington, DC
January 30, 1997,  except for the  penultimate  paragraph of Note 6, as to which
the date is March 13, 1997, the pre-penultimate paragraph of Note 6, as to which
the date is August 8, 1997,  the  subsequent  events  paragraph of Note 7, as to
which the date is July 15,  1997,  and Note 13, as to which the date is  October
27, 1997
    


<PAGE>


                      THE AES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
                                                                                             -------------------------
                                                                                               1996           1995
In millions, except par values                                                               ----------   ------------
<S>                                                                                          <C>          <C>
ASSETS
Current Assets:
 Cash and cash equivalents ...............................................................   $  185        $  239
 Short-term investments ..................................................................       20            58
 Accounts receivable, net  ...............................................................       95            54
 Inventory  ..............................................................................       81            36
 Receivable from affiliates   ............................................................        9            11
 Deferred income taxes  ..................................................................       65            21
 Prepaid expenses and other current assets   .............................................       47            27
                                                                                             -------       -------
Total current assets .....................................................................      502           446
Property, Plant and Equipment:
 Land ....................................................................................       30             9
 Electric and steam generating facilities ................................................    1,884         1,594
 Furniture and office equipment  .........................................................       14            11
 Accumulated depreciation and amortization   .............................................     (282)         (222)
 Construction in progress  ...............................................................      574           158
                                                                                             -------       -------
Property, plant and equipment, net  ......................................................    2,220         1,550
Other Assets:
 Deferred costs, net .....................................................................       47            32
 Project development costs ...............................................................       53            41
 Investments in and advances to affiliates   .............................................      491            48
 Debt service reserves and other deposits ................................................      175           168
 Goodwill & other intangible assets, net  ................................................       52            37
 Other assets  ...........................................................................       82            19
                                                                                             -------       -------
Total other assets   .....................................................................      900           345
                                                                                             -------       -------
Total ....................................................................................   $3,622        $2,341
                                                                                             =======       =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 Accounts payable ........................................................................   $   64        $   33
 Accrued interest ........................................................................       25            12
 Accrued and other liabilities   .........................................................       95            49
 Other notes payable -- current portion   ................................................       88            50
 Project financing debt -- current portion   .............................................      110            84
                                                                                             -------       -------
Total current liabilities  ...............................................................      382           228
Long-Term Liabilities:
 Project financing debt ..................................................................    1,558         1,098
 Other notes payable .....................................................................      450           125
 Deferred income taxes  ..................................................................      243           170
 Other long-term liabilities  ............................................................       55            13
                                                                                             -------       -------
Total long-term liabilities   ............................................................    2,306         1,406
Minority Interest ........................................................................      213           158
Commitments and Contingencies ............................................................       --            --
Stockholders' Equity:
Preferred stock (no par value; 2 million shares authorized; none issued)   ...............       --            --
Common stock ($.01 par value; 500 million shares authorized; shares issued
  and outstanding: 1996
 -- 154.8 million; 1995 -- 149.6 million) ................................................        1             1
Additional paid-in capital ...............................................................      360           293
Retained earnings ........................................................................      396           271
Cumulative foreign currency translation adjustment .......................................      (33)          (10)
Less treasury stock at cost (1996 -- .2 million shares; 1995 -- .6 million shares)  ......       (3)           (6)
                                                                                             -------       -------
Total stockholders' equity ...............................................................      721           549
                                                                                             -------       -------
Total ....................................................................................   $3,622        $2,341
                                                                                             =======       =======
</TABLE>

                 See Notes to Consolidated Financial Statements.


<PAGE>


                      THE AES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                            ---------------------------------
                                                                               1996        1995        1994
In millions, except per share amounts                                       ---------   ---------   ---------
<S>                                                                         <C>         <C>         <C>
REVENUES:
 Sales ..................................................................    $  824      $  672      $  514
 Services ...............................................................        11           7          19
                                                                             ------      ------      ------
Total revenues  .........................................................       835         679         533
OPERATING COSTS AND EXPENSES:
 Cost of sales  .........................................................       495         388         252
 Cost of services  ......................................................         7           6          13
 Selling, general and administrative expenses ...........................        35          32          32
 Provision to reduce contract receivable   ..............................        20          --          --
                                                                             ------      ------      ------
Total operating costs and expenses   ....................................       557         426         297
                                                                             ------      ------      ------
Operating Income   ......................................................       278         253         236
OTHER INCOME AND (EXPENSE):
 Interest expense  ......................................................      (144)       (127)       (125)
 Interest income   ......................................................        24          27          22
 Equity in earnings of affiliates (net of income tax)  ..................        35          14          12
                                                                             ------      ------      ------
INCOME BEFORE INCOME TAXES,
 MINORITY INTEREST,
 AND EXTRAORDINARY ITEM  ................................................       193         167         145
INCOME TAXES ............................................................        60          57          44
MINORITY INTEREST  ......................................................         8           3           3
                                                                             ------      ------      ------
INCOME BEFORE EXTRAORDINARY ITEM  .......................................       125         107          98
Extraordinary item -- net gain on extinguishment of debt (less applicable
 income taxes of $1)  ...................................................        --          --           2
                                                                             ------      ------      ------
NET INCOME   ............................................................    $  125      $  107      $  100
                                                                             ======      ======      ======
NET INCOME PER SHARE:
 Before extraordinary gain  .............................................    $ 0.81      $ 0.71      $ 0.65
 Extraordinary gain   ...................................................        --          --        0.01
                                                                             ------      ------      ------
NET INCOME PER SHARE  ...................................................    $ 0.81      $ 0.71      $ 0.66
                                                                             ======      ======      ======
</TABLE>

Note: All per share amounts have been adjusted for the 2 for 1 stock split
      effective July 28, 1997.

                 See Notes to Consolidated Financial Statements.


<PAGE>


                      THE AES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                               FOR THE YEARS ENDED
                                                                                    DECEMBER 31,
                                                                     ----------------------------------------
                                                                           1996          1995         1994
In millions, except per share amounts                                -------------   -----------   ----------
<S>                                                                  <C>             <C>           <C>
OPERATING ACTIVITIES:
Net income  ......................................................    $    125        $  107       $  100
Adjustments to net income: .......................................
 Depreciation and amortization   .................................          65            55           43
 Provision for deferred taxes ....................................          26            48           39
 Undistributed earnings of affiliates  ...........................         (20)            3           (3)
 Payments for deferred financing costs ...........................         (13)           (3)          (6)
 Other   .........................................................           6             4           --
 Changes in working capital   ....................................          (7)          (17)          (9)
                                                                      ---------       -------      -------
Net cash provided by operating activities ........................         182           197          164
INVESTING ACTIVITIES:
Property additions   .............................................        (506)         (171)         (10)
Acquisitions, net of cash acquired  ..............................        (148)         (121)          --
Sale of short-term investments   .................................         103           254          132
Purchase of short-term investments  ..............................         (66)         (218)        (204)
Affiliate advances and investments  ..............................        (430)          (10)          --
Project development costs  .......................................         (16)          (22)         (17)
Debt service reserves and other assets ...........................         (72)          (55)         (21)
                                                                      ---------       -------      -------
Net cash used in investing activities  ...........................      (1,135)         (343)        (120)
FINANCING ACTIVITIES:
Net borrowings (repayments) under the revolver  ..................         163            50           --
Issuance of project financing debt and other notes payable  ......         802           133           --
Repayments of project financing debt   ...........................         (75)          (63)         (72)
Other liabilities ................................................          (3)            8           --
Contributions by minority interests ..............................          10             7          152
Sale (repurchase) of common stock   ..............................           2            (5)          --
                                                                      ---------       -------      -------
Net cash provided by financing activities ........................         899           130           80
INCREASE/(DECREASE) IN CASH AND CASH
 EQUIVALENTS   ...................................................         (54)          (16)         124
CASH AND CASH EQUIVALENTS, BEGINNING   ...........................         239           255          131
                                                                      ---------       -------      -------
CASH AND CASH EQUIVALENTS, ENDING   ..............................    $    185        $  239       $  255
                                                                      =========       =======      =======
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest .......................................    $    134        $  120       $  127
Cash payments for income taxes   .................................          32             6            3
</TABLE>

                 See Notes to Consolidated Financial Statements.


<PAGE>


                      THE AES CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The AES Corporation and its subsidiaries and affiliates  (collectively  "AES" or
the "Company") is a global power company primarily engaged in developing, owning
and operating electric power generating facilities.

PRINCIPLES OF  CONSOLIDATION  -- The  consolidated  financial  statements of the
Company include the accounts of AES, its subsidiaries and controlled affiliates.
Investments  in 50% or less  owned  affiliates  over which the  Company  has the
ability to exercise  significant  influence,  but not control, are accounted for
using the equity  method.  The accounts of AES China  Generating  Co. Ltd. ("AES
Chigen"),  a controlled  affiliate,  are  consolidated  based on its fiscal year
ended November 30. Intercompany transactions and balances have been eliminated.

CASH AND CASH  EQUIVALENTS -- The Company  considers  cash on hand,  deposits in
banks,  certificates  of deposit and short-term  marketable  securities  with an
original maturity of three months or less as cash and cash equivalents.

INVESTMENTS  --  Securities  that the Company has both the  positive  intent and
ability to hold to maturity are classified as  held-to-maturity  and are carried
at historical cost.  Other  investments that the Company does not intend to hold
to maturity are classified as  available-for-sale,  and any unrealized  gains or
losses are recorded as a separate  component of stockholders'  equity.  Interest
and  dividends  on  investments  are  reported  in interest  income.  Short-term
investments  consist of investments with original  maturities in excess of three
months but less than one year. Debt service  reserves and other deposits,  which
might  otherwise  be  considered  cash  and  cash  equivalents  are  treated  as
noncurrent assets (see Note 3).

INVENTORY --  Inventory,  valued at the lower of cost or market (first in, first
out method), consists of coal, raw materials, spare parts, and supplies.
Inventory consists of the following (in millions):

                                              --------------

                                               DECEMBER 31,
                                              --------------
                                                1996    1995
                                              ------   -----
Coal and other raw materials   ............     $57     $ 24
Spare parts, materials and supplies  ......      24       12
                                                  -        -
Total  ....................................     $81     $ 36
                                               ====     =====

PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated at cost
including the cost of improvements. Depreciation, after consideration of salvage
value, is computed using the straight-line  method over the estimated  composite
lives of the assets, which range from 3 to 40 years. Maintenance and repairs are
charged to expense as incurred.  Emergency and rotable  spare parts  inventories
are included in electric and steam  generating  facilities  and are  depreciated
over the useful life of the related components.

INTANGIBLE  ASSETS -- Goodwill and other  intangible  assets are  amortized on a
straight-line  basis over their estimated  periods of benefit or their estimated
lives,  which range from 30 to 40 years.  Intangible assets at December 31, 1996
and 1995 are shown net of accumulated amortization of $3 million and $1 million,
respectively.   The  Company  will  review  its  goodwill  and  intangibles  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be recoverable.

CONSTRUCTION IN PROGRESS -- Construction  progress payments,  engineering costs,
insurance  costs,  wages,  interest and other costs relating to  construction in
progress are capitalized.  Construction in progress  balances are transferred to
electric  and steam  generating  facilities  when the assets are ready for their
intended use. Interest  capitalized during development and construction  totaled
$27 million, $8 million and $2 million in 1996, 1995 and 1994, respectively.

DEFERRED  COSTS  --  Financing  costs  are  deferred  and  amortized  using  the
straight-line  method over the related financing  period,  which does not differ
materially from the effective  interest method of  amortization.  Deferred costs
are shown net of  accumulated  amortization  of $36  million and $31 million for
1996 and 1995, respectively.


<PAGE>


PROJECT DEVELOPMENT COSTS -- The Company capitalizes the costs of developing new
projects.  These costs represent  amounts  incurred for  professional  services,
salaries, permits, options, capitalized interest and other related direct costs.
These  costs are  included  in  investments  in  affiliates,  or  property  when
financing is  obtained,  or expensed at the time the Company  determines  that a
particular project will no longer be developed.  The continued capitalization is
subject to on-going  risks related to  successful  completion,  including  those
related to political, siting, financing,  construction,  permitting and contract
compliance.  Certain reimbursable costs related to one of the projects have been
classified as other assets at December 31, 1996.

FOREIGN CURRENCY  TRANSLATION -- Foreign  subsidiaries and affiliates  translate
their assets and liabilities  into U.S. dollars at the current exchange rates in
effect at the end of the fiscal  period.  The gains or losses  that  result from
this  process,  and gains  and  losses on  intercompany  transactions  which are
long-term  in nature,  and which the Company does not intend to  repatriate  are
shown in the cumulative foreign currency  translation  adjustment balance in the
stockholders'  equity  section of the  balance  sheet.  The  revenue and expense
accounts of foreign subsidiaries and affiliates are translated into U.S. dollars
at the average exchange rates that prevailed during the period.

REVENUE  RECOGNITION AND  CONCENTRATION -- Revenues from the sale of electricity
and steam are recorded  based upon output  delivered  and  capacity  provided at
rates as specified under contract terms. Most of the Company's power plants rely
primarily on one power sales contract with a single customer for the majority of
its  revenues.  Five  customers  accounted  for 20%,  16%,  16%,  11% and 10% of
revenues in 1996, four customers accounted for 24%, 18%, 18% and 13% of revenues
in 1995, and four  customers  accounted for 31%, 23%, 22% and 11% of revenues in
1994. The prolonged failure of any of these customers to fulfill its contractual
obligations  could have a  substantial  negative  impact on AES's  revenues  and
profits.  However,  the  Company  does  not  anticipate  non-performance  by the
customers under these contracts.

INTEREST RATE SWAP AND CAP  AGREEMENTS -- The Company  enters into interest rate
swap and cap  agreements as a hedge  against  interest rate exposure on floating
rate project  financing debt. The  transactions are accounted for as a hedge and
interest  is  expensed  or  capitalized,  as  appropriate,  using the  effective
interest rates. Any fees or payments are amortized as yield  adjustments.  These
derivative financial instruments are classified as other than trading.

NET INCOME PER SHARE -- Net  income per share is based on the  weighted  average
number of common stock and common stock  equivalents  outstanding,  after giving
effect to stock splits and stock dividends. Common stock equivalents result from
dilutive stock options,  warrants and deferred  compensation  arrangements.  The
effect of such  common  stock  equivalents  on net income per share is  computed
using the treasury  stock  method.  The shares used in computing  net income per
share were 154.6 million,  151.8 million,  and 151.6 million for 1996,  1995 and
1994,   respectively.   Primary  and  fully  diluted   earnings  per  share  are
approximately the same.

NEW ACCOUNTING  PRONOUNCEMENTS  -- Statement of Financial  Accounting  Standards
(SFAS) No. 128 "Earnings  Per Share," was issued in early 1997.  SFAS No. 128 is
effective for periods  ending after  December 15, 1997 and early adoption is not
permitted.  SFAS No. 128 requires  the Company to compute and present  basic and
diluted  earnings  per share.  Had the Company  computed  earnings  per share in
accordance  with SFAS No. 128 the basic and diluted  amounts  would have been as
follows:

                                     --------------------------

                                      YEARS ENDED DECEMBER 31,
                                     --------------------------
                                        1996      1995     1994
                                     -------   -------   ------

Basic earnings per share .........    $ .83     $ .72     $ .67
Diluted earnings per share  ......    $ .80     $ .70     $ .66

USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates. Actual
results could differ from those estimates.

RECLASSIFICATIONS  -- Certain  reclassifications  have been made to prior period
amounts to conform with the 1996 presentation.


<PAGE>


2. ACQUISITIONS

In March 1996,  the  Company,  through a  subsidiary  acquired a 98% interest in
Hidrot-rmica San Juan,  S.A., ("AES San Juan"),  which is the owner and operator
of a 78 megawatt Power Supply  Business in the province of San Juan,  Argentina.
The facility, which sells electricity into the Argentine spot market, includes a
45 megawatt hydroelectric power plant and a 33 megawatt gas combustion plant. As
a result of this  acquisition,  the Company  acquired  intangible  assets of $17
million which are being amortized over the life of the hydroelectric  concession
of 30 years.

In May 1996, AES, through certain subsidiaries,  acquired for approximately $393
million,  common shares  representing  an 11.35%  interest in Light  Servi-os de
Electricidade  S. A.  ("Light"),  a  publicly-held  Brazilian  corporation  that
operates as the  concessionaire  of an approximately  3,800 megawatt  integrated
electric power generation, transmission and distribution system which serves Rio
de  Janeiro,  Brazil.  The AES  subsidiary  which owns an  interest  in Light is
participating in a consortium established through a shareholders' agreement that
owns a 50.44% controlling  interest. As a result, the Company has the ability to
exert  significant  influence over the operation of Light,  and is recording its
investment using the equity method.

In August  1996,  the  Company,  through a  subsidiary,  acquired a  controlling
interest in three power  plants  totaling  1,281 MW and a coal mine  through the
purchase  of an 81% share of Tiszai  Eromu Rt.  ("AES  Tiszai")  an  electricity
generation company in Hungary for $110 million, and in December 1996 acquired an
additional 13% for $17 million.

Also, in August 1996,  the Company  acquired,  through a subsidiary,  a majority
controlling interest in a 4,000 megawatt coal-fired facility in Kazakstan, ("AES
Ekibastuz"),  for  approximately  $3  million.  The  facility  sells  power to a
government-owned  utility  under a 35 year  power  purchase  agreement.  Through
December 31, 1996,  approximately  $35 million  (excluding  VAT) has been billed
under the power sales contract for electricity  delivered of which the purchaser
has paid  approximately $5 million.  The Company has recorded a provision of $20
million to reduce the carrying value of the contract  receivable at December 31,
1996 to $10 million. As of December 31, 1996, the net assets of the project were
$24  million,  a portion of which was  represented  by the  contract  receivable
referred to above.  There can be no assurance as to the ultimate  collectibility
of amounts owed to AES as of December 31, 1996 or additional  amounts related to
future deliveries of electricity under the power sales contract.

In January 1995, a subsidiary of the Company acquired the remaining  outstanding
debt of AES Deepwater, a 140 megawatt cogeneration plant in Pasadena, Texas, for
$65 million from a syndicate of lenders. Prior to that date, the Company did not
maintain or exercise  control or significant  influence over the  utilization of
the AES Deepwater facility,  and accordingly,  recorded its investment using the
cost  method.   The  acquisition   resulted  in  the  creation  of  goodwill  of
approximately $24 million which is being amortized over the remaining  estimated
life of the plant.

In June and July 1995,  a  subsidiary  of the Company  increased  its  ownership
interest  in Central  T-rmica  San  Nicolas,  S. A. ("AES San  Nicolas"),  a 650
megawatt power plant located in San Nicolas, Argentina from approximately 34% to
approximately   69%  by  purchasing   the  interests  of  two  former   minority
shareholders.  The  1995  purchase  price  was  $24  million.  The  net  results
attributable to the Company's non-owned portion of earnings from AES San Nicolas
in 1995 is reflected as minority interest.

In addition,  in December  1995,  another  subsidiary  of the Company  purchased
Hidroel-ctrica   Rio  Juramento  S.A.  ("AES  Rio  Juramento")  a  112  megawatt
hydroelectric  system in the province of Salta,  Argentina for $43 million. As a
result  of this  acquisition,  the  Company  acquired  intangible  assets of $14
million which are being amortized over the life of the hydroelectric  concession
of 30 years.

These  acquisitions  were  accounted  for  as  purchases.   The  purchase  price
allocations  for Light,  AES Tiszai and AES Ekibastuz  have been  completed on a
preliminary basis, subject to adjustments resulting from new or additional facts
that may come to light when the engineering,  environmental,  and legal analyses
are  completed  during  the  allocation  period.   The  accompanying   financial
statements  include the operating results of AES Tiszai from August 1, 1996, the
operating  results of AES Ekibastuz from August 10, 1996,  equity  earnings from
Light  from June 10,  1996,  and the  operating  results of AES  Deepwater  from
January 20, 1995, the operating  results of AES San Nicolas from January 1, 1995
and the  operating  results of AES Rio  Juramento  from  December  1, 1995.  The
following table presents supplemental unaudited proforma operating results as if
all of the  acquisitions  had occurred at the  beginning  of 1995 (in  millions,
except per share amounts):


<PAGE>

<TABLE>
<CAPTION>

                                                                       -----------------

                                                                         FOR THE YEARS
                                                                             ENDED
                                                                          DECEMBER 31,
                                                                       -----------------
                                                                          1996      1995
                                                                       -------    ------
<S>                                                                     <C>        <C>  
Revenues   .........................................................    $1,013     $ 892
Net income .........................................................       100        91
Earnings per share  ................................................    $ 1.29     $1.20
</TABLE>

The pro forma results are based upon assumptions and estimates which the Company
believes are  reasonable.  The pro forma results do not purport to be indicative
of the results  that  actually  would have been  obtained  had the  acquisitions
occurred on January 1, 1995,  nor are they intended to be a projection of future
results.

3. INVESTMENTS

AT DECEMBER 31, 1996 AND 1995,  THE  COMPANY'S  INVESTMENTS  WERE  CLASSIFIED AS
EITHER HELD-TO-MATURITY OR AVAILABLE-FOR-SALE.  THE amortized cost and estimated
fair value of the  investments  at  December  31,  1996 and 1995  classified  as
held-to-maturity and available-for-sale were approximately the same.

The  short-term  investments  and debt service  reserves and other deposits were
invested as follows (in millions):

<TABLE>
<CAPTION>

                                                                        ---------------

                                                                          DECEMBER 31,
                                                                        ---------------
                                                                          1996     1995
                                                                        -------   -----
<S>                                                                       <C>      <C> 
Restricted cash and cash equivalents   ..............................     $104     $144
Held-to-maturity US treasury and government agency securities  ......        1       33
Foreign certificates of deposit  ....................................       --        3
Commercial paper  ...................................................       39        3
Floating rate notes  ................................................       --        6
                                                                         -----    -----
Subtotal ............................................................       40       45
Available-for-sale:
US treasury and government agency securities ........................       43       30
Certificates of deposit .............................................        3        4
Commercial paper  ...................................................        5       --
Foreign certificates of deposit  ....................................       --        3
                                                                         -----    -----
Subtotal ............................................................       51       37
                                                                         -----    -----
Total ...............................................................     $195     $226
                                                                         =====    =====
</TABLE>

Short-term  investments  classified as held-to-maturity  and  available-for-sale
were $9 and $11 million,  respectively, at December 31, 1996 and $44 million and
$14 million, respectively, at December 31, 1995.


<PAGE>


4. INVESTMENTS IN AND ADVANCES TO AFFILIATES

The following table presents summarized financial  information (in millions) for
equity method affiliates on a combined 100% basis. Amounts presented include the
accounts of NIGEN,  Ltd. (47% owned UK affiliate),  Medway Power Ltd. (25% owned
UK  affiliate),  Light  (11.35%  owned  Brazilian  affiliate)  and AES  Chigen's
affiliates  at December 31, 1996,  and for the year then ended,  the accounts of
NIGEN,  Ltd.  and Medway  Power Ltd. at  December  31, 1995 and 1994 and for the
years  then  ended,  and  the  accounts  of San  Nicolas  (34%  owned  Argentine
affiliate) at December 31, 1994 and for the year then ended.


                                 ---------------------------

                                    1996      1995      1994
                                  ------   -------    ------
Sales ........................    $1,960      $276     $ 335
Operating income  ............       498        86        75
Net income  ..................       383        49        33
Current assets ...............       891       171       156
Noncurrent assets ............     4,928       949     1,030
Current liabilities  .........       868        70       133
Noncurrent liabilities  ......     2,111       973       945
Stockholders' equity .........     2,840        77       108

In 1994, NIGEN, Ltd. refinanced its outstanding project financing loan through a
public  debenture  offering.  The  extinguishment  of such debt  resulted  in an
extraordinary loss of $7 million. The Company's share, $2 million, net of taxes,
is included in the accompanying financial statements as an extraordinary loss.

The  Company's  share  of  undistributed  earnings  of  affiliates  included  in
consolidated  retained  earnings was $33 million and $13 million at December 31,
1996 and 1995, respectively.  The Company charged and recognized management fees
and  interest on advances to its  affiliates  which  aggregated  $9 million,  $8
million and $18 million for each of the years ended December 31, 1996,  1995 and
1994, respectively.

5. DEBT

PROJECT  FINANCING DEBT -- Project  financing debt at December 31, 1996 and 1995
consisted of the following (in millions):


<TABLE>
<CAPTION>
                                            --------------------------------------------------

                                              INTEREST
                                                RATE
                                             @ 12/31/96     FINAL MATURITY     1996       1995
                                            ------------   ----------------  ------     ------
<S>                                              <C>             <C>          <C>        <C>
SENIOR DEBT--FLOATING
AES Beaver Valley   .....................        7.4%            1998         $  21      $  33
AES Thames ..............................        6.8%            2004           163        181
AES Shady Point  ........................        7.4%            2004           306        320
AES Barbers Point   .....................        6.5%            2007           325        340
AES Lal Pir   ...........................        5.0%            2008           135         28
AES Pak Gen   ...........................        5.1%            2010            90         --
AES Coral Reef   ........................       10.1%            2003           168         --
AES Warrior Run  ........................        6.7%            2014            37         22
Other   .................................       10.4%            2001             8         --
SENIOR DEBT--FIXED
AES Placerita--capital lease ............        8.1%            2009           105        111
AES Warrior Run--tax exempt bonds  ......        7.4%            2019            74         74
AES Pak Gen   ...........................        4.3%            2007            85         --
AES San Nicolas  ........................       10.4%            2000            80         --
Subordinated Debt   .....................       13.6%            2010            71         73
                                                                             ------     ------
Subtotal   ..............................                                     1,668       1182
Less current maturities   ...............                                      (110)       (84)
                                                                             ------     ------
Total   .................................                                    $1,558     $1,098
                                                                             ======     ======
</TABLE>


<PAGE>


Project  financing debt borrowings are primarily  collateralized  by the capital
stock of the project  subsidiary,  the physical  assets of such facility and all
project agreements associated with such facility.

In 1994, the Company purchased and retired  subordinated  project financing debt
and accrued interest at AES Placerita,  resulting in an extraordinary gain of $4
million, net of taxes.

The Company has interest rate swap agreements in an aggregate notional principal
amount of $550  million at December 31, 1996.  The swap  agreements  effectively
change the  interest  rate on the  portion of the debt  covered by the  notional
amounts,  to a weighted  average fixed rate ranging from  approximately  9.5% to
10.5%.  The  agreements  expire at various  dates from 1997 through 2007. In the
event of nonperformance by the  counterparties,  the subsidiaries may be exposed
to  increased  interest  rates,   however,   the  Company  does  not  anticipate
nonperformance  by  the  counterparties,   which  are  multinational   financial
institutions.  At December 31, 1996,  subsidiaries  of the Company have interest
rate cap agreements at a ceiling of  approximately  12.5% with  remaining  terms
ranging from three to six years in an aggregate notional amount of $280 million.

AES Shady Point and AES Barbers Point have issued  commercial paper supported by
irrevocable letters of credit issued by multinational financial institutions. In
the event of nonperformance or credit  deterioration of these institutions,  the
Company  may be  exposed to the risk of higher  effective  interest  rates.  The
Company does not believe that such  nonperformance  or credit  deterioration  is
likely.

OTHER  NOTES  PAYABLE -- Other  notes  payable  at  December  31,  1996 and 1995
consisted of the following (in millions):


<TABLE>
<CAPTION>
                                              ---------------------------------------------------

                                               INTEREST RATE
                                                @ 12/31/96      FINAL MATURITY    1996      1995
                                              --------------   ---------------- ------    ------
<S>                                           <C>              <C>                <C>       <C>
Corporate revolving bank loan(1)  .........        7.40%             1998         $213      $ 50
Senior subordinated notes   ...............        9.75%             2000           75        75
Convertible subordinated debentures  ......        6.50%             2002           --        50
Senior subordinated notes   ...............       10.25%             2006          250        --
                                                                                 -----     -----
 Subtotal .................................                                        538       175
Less current maturities  ..................                                        (88)      (50)
                                                                                 -----     -----
 Total ....................................                                       $450      $125
                                                                                 =====     =====
</TABLE>

----------
(1) Floating rate loan.


Under the terms of the $425 million corporate  revolving bank loan and letter of
credit facility  ("Revolver"),  the Company must reduce its direct borrowings to
$125  million  for 30  consecutive  days  annually to obtain  additional  loans.
Commitment  fees on the unused portion at December 31, 1996 are .375% per annum,
and as of that date $89  million  was  available.  The  Company's  9 3/4% senior
subordinated  notes due 2000 ("9 3/4%  Notes)  and 10 1/4%  senior  subordinated
notes  due 2006 ("10 1/4%  Notes")  are  general  unsecured  obligations  of the
Company. The 9 3/4% Notes are redeemable at the Company's option, in whole or in
part,  beginning  June  1997  at  redemption  prices  in  excess  of par and are
redeemable at par beginning  June 1999.  The 10 1/4% Notes are redeemable at the
Company's option, in whole or in part,  beginning July 2001 at redemption prices
in excess of par and are  redeemable at par beginning  July 2003.  The Company's
convertible  subordinated  debentures  ("Debentures") were converted into common
stock of the Company at the rate of $26.16 per common share on August 30, 1996.


<PAGE>


FUTURE  MATURITIES OF DEBT -- Scheduled  maturities of total  long-term  debt at
December 31, 1996 are (in millions):

         1997  ............   $  198
         1998  ............      132
         1999  ............      303
         2000  ............      269
         2001  ............      202
         Thereafter  ......    1,102
                             -------
         Total ............   $2,206
                             =======

COVENANTS -- The terms of the Company's  Revolver,  9 3/4% Notes, 10 1/4% Notes,
and project financing debt agreements  contain certain covenants and provisions.
The covenants  provide for, among other items,  maintenance of certain reserves,
and  require  that  minimum  levels of working  capital,  net worth and  certain
financial ratio tests are met. The most  restrictive of these covenants  include
limitations  on  incurring  additional  debt and on the payment of  dividends to
shareholders.

The project financing debt limitations of AES's subsidiaries  permit the payment
of  dividends  to the parent  company  out of current  cash flow for  quarterly,
semi-annual  or annual  periods  only at the end of such  periods and only after
payment  of  principal  and  interest  on  project  loans due at the end of such
periods. As of December 31, 1996,  approximately $63 million was available under
project loan documents for distribution by U.S. subsidiaries.

AES CHIGEN NOTES --  Subsequent  to its fiscal year end, AES Chigen  issued $180
million of 10 1/8% Notes due 2006.

6. COMMITMENTS AND CONTINGENCIES

As of December  31,  1996,  the Company and its  consolidated  subsidiaries  are
obligated under long-term  non-cancelable operating leases, primarily for office
rental and site leases.  Rental expense for operating leases was $4 million,  $3
million and $2 million in the years ended 1996, 1995 and 1994, respectively. The
future minimum lease commitments under these leases are $6 million each year for
1997 and 1998, $5 million for 1999, $2 million each year for 2000 and 2001,  and
$56 million for the years thereafter.

Operating subsidiaries of the Company enter into various long-term contracts for
the  purchase  of  fuel  subject  to   termination   only  in  certain   limited
circumstances. These contracts have remaining terms of 3 to 11 years.

GUARANTEES -- In connection with certain of its project financing,  acquisition,
disposition, and power purchase agreements, AES has expressly undertaken limited
obligations  and  commitments  most of which will only be  effective  or will be
terminated  upon  the  occurrence  of  future  events.   These  obligations  and
commitments,  excluding  letter  of credit  obligations  discussed  below,  were
limited as of December 31, 1996, by the terms of the agreements, to an aggregate
of  approximately  $176  million.  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 $33
million as of December 31, 1996.

LETTERS OF CREDIT -- At December 31, 1996 and 1995, the Company had $123 million
and $56 million, respectively, of letters of credit outstanding under its credit
facility  which  operate to guarantee  performance  relating to certain  project
development activities and subsidiary  operations.  The Company pays a letter of
credit fee of 1.75% on the outstanding amounts.

LITIGATION -- On February 25, 1993, an action was filed,  jointly and severally,
in the 10th  Judicial  District  Court,  Galveston  County,  Texas  against  the
Company, over 25 other corporations (including major oil refineries and chemical
companies)  and  utilities,  a utility  district,  four Texas  cities,  McGinnes
Industrial  Maintenance  Corporation,  Roland  McGinnes and  Lawrence  McGinnes,
claiming  personal  injuries,  property,  and  punitive  damages of $20 billion,
arising from alleged releases of hazardous and toxic substances to air, soil and
water at the McGinnes  waste  disposal  site located in Galveston  County.  This
matter was  consolidated  with two other  related  cases in December  1993.  The
complaint sets forth numerous causes of action,  including fraud, negligence and
strict liability, including, among other things, allegations that the defendants
sent  hazardous,  toxic and noxious  chemicals  and other waste  products to the
McGinnes site for disposal. In March 1995, the Company entered into a settlement
agreement  with  certain  plaintiffs,  pursuant to which the Company  paid seven
thousand  dollars in return for  withdrawal of their claims against the Company.


<PAGE>


   
On August 8, 1997, the Company  settled all claims with respect to the remaining
plaintiffs for  approximately  twelve  thousand  dollars plus legal costs.  This
matter is now concluded.
    

On December 17, 1996, AES was named  defendant in a complaint filed in the Court
of Chancery in Delaware. The suit was brought by the holder of 750 shares of AES
Chigen Class A Common Stock  individually  and on behalf of a purported class of
public  shareholders  of AES Chigen in response to an amalgamation to be entered
into between AES Chigen and AES. The complaint alleges, among other things, that
AES breached its alleged  fiduciary  duty as a controlling  shareholder to treat
the class with fairness,  and questions the sufficiency of the  consideration to
be paid to AES Chigen shareholders.  The complaint sought damages and injunctive
relief.  AES Chigen was not named in the suit. On March 13, 1997  settlement was
reached subject to court approval.

The Company is involved in certain other legal  proceedings in the normal course
of  business.  It is the  opinion  of  the  Company  that  none  of the  pending
litigation  is  expected  to have a material  adverse  effect on its  results of
operations or financial position.

7. STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                    ------------------------------------

                                                                        1996          1995          1994
                                                                     -------       -------        ------
In millions
<S>                                                                    <C>           <C>           <C>
Common stock
 Balance at January 1 and December 31   ...........................    $   1         $   1         $   1
                                                                      ======        ======        ======
Additional paid-in capital
 Balance at January 1 .............................................    $ 293         $ 240         $ 203
 Issuance of common stock under benefit plans and exercise of stock
   options and warrants  ..........................................        3             2             2
 Tax benefit associated with the exercise of options   ............       15            --            --
 Issuance of common stock on conversion of 6.5% subordinated
   debentures, net ($13.08 per share)..............................       49            --            --
 Common stock dividends (1994-3% per share)   .....................       --            --            47
 AES Chigen Class A redeemable common stock   .....................       --            51           (12)
                                                                      ------        ------        ------
Balance at December 31   ..........................................    $ 360         $ 293         $ 240
                                                                      ======        ======        ======
Retained earnings
 Balance at January 1 .............................................    $ 271         $ 164         $ 111
 Net income for the year ..........................................      125           107           100
 Common stock dividends (1994-3% per share)   .....................       --            --           (47)
                                                                      ------        ------        ------
Balance at December 31   ..........................................    $ 396         $ 271         $ 164
                                                                      ======        ======        ======
Cumulative foreign currency translation adjustment
 Balance at December 31  ..........................................    $ (33)        $ (10)        $  (3)
                                                                      ======        ======        ======
Treasury stock
 Balance at December 31  ..........................................    $  (3)        $  (6)        $  --
                                                                      ======        ======        ======
</TABLE>


STOCK SPLIT AND STOCK  DIVIDEND -- On December 7, 1993,  the Board of  Directors
authorized  a  three-for-two  split,  effected in the form of a stock  dividend,
payable to stockholders of record on January 15, 1994. Additionally, on February
17, 1994, the Company  declared a 3% stock dividend,  payable to stockholders of
record on March 10, 1994.  Accordingly,  all  outstanding  share,  per share and
stock  option data in all periods  presented  have been  restated to reflect the
split and the 3% stock dividend.


<PAGE>


On July 30, 1996, the Company  exercised its right to redeem the Debentures at a
redemption  price equal to  approximately  104% of the  principal  amount of the
debentures,  together with accrued interest through the date of redemption. As a
result,  $49.7 million of the debentures  were converted into 3.8 million shares
of common stock of the Company at a conversion price of $13.08 per share.

SUBSEQUENT  EVENT -- On July 15,  1997,  the  Board of  Directors  authorized  a
two-for-one-split,  effected  in  the  form  of a  stock  dividend,  payable  to
stockholders of record on July 28, 1997. Accordingly, all outstanding share, per
share and stock  option  data in all  periods  presented  have been  restated to
reflect the split.


STOCK  OPTIONS AND  WARRANTS  -- The  Company has granted  options for shares of
common stock under its stock  option  plans.  Under the terms of the plans,  the
Company may issue options to purchase shares of the Company's  common stock at a
price equal to 100% of the market  price at the date the option is granted.  The
options become  eligible for exercise under various  schedules.  At December 31,
1996, there were approximately 4 million shares reserved for future grants under
the plans.  A summary of the option  activity  follows (in thousands of shares):



<TABLE>
<CAPTION>
                                                 -----------------------------------------------------------------------

                                                                              DECEMBER 31,
                                                 -----------------------------------------------------------------------
                                                                   1996                     1995                    1994
                                                 ----------------------   ----------------------   ---------------------
                                                             WEIGHTED-                WEIGHTED-                WEIGHTED-
                                                              AVERAGE                  AVERAGE                 AVERAGE
                                                             EXERCISE                 EXERCISE                 EXERCISE
                                                   SHARES      PRICE       SHARES       PRICE       SHARES      PRICE
                                                 --------   -----------   --------   -----------   --------   ----------
<S>                                               <C>         <C>          <C>         <C>          <C>         <C>
Options outstanding--beginning of year  ......    8,126       $ 7.28       7,080       $ 6.04       5,998       $ 4.89
Exercised during the year   ..................     (960)        5.35        (710)        8.86        (374)        1.33
Forfeitures during the year ..................     (432)       10.28        (114)        9.18         (24)        6.59
Granted during the year  .....................    1,286        19.39       1,870        10.02       1,480         9.46
                                                  -----                    -----                    -----       
Outstanding--end of year .....................    8,020         9.30       8,126         7.28       7,080         6.04
                                                  =====                    =====                    =====       
Eligible for exercise--end of year   .........    4,264         6.43       2,418         4.52       2,118         3.01
                                                  =====                    =====                    =====
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1996 (in thousands of shares):


<TABLE>
<CAPTION>
                           --------------------------------------------------------------------------------------------

                                             OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                           ------------------------------------------------------- ------------------------------------
                                                REMAINING LIFE   WEIGHTED-AVERAGE                      WEIGHTED-AVERAGE
  RANGE OF EXERCISE PRICES  TOTAL OUTSTANDING     (IN YEARS)     EXERCISE PRICE    TOTAL EXERCISABLE     EXERCISE PRICE
-------------------------- ------------------- ---------------- ------------------ ------------------- ----------------
<S>                               <C>                 <C>             <C>                 <C>               <C>
$.78 to $3.24 ............        2,026               3.3             $ 2.57              2,022             $ 2.57
$5.83 to $9.88............        2,522               6.9               8.77                984               8.72
$10.00 to $14.44 .........        2,496               8.3              10.49              1,186              10.40
$15.88 to $22.07 .........          976              10.0              21.57                 72              18.16
                                  ------                                                  ------
Total   ..................        8,020                                                   4,264
                                  ======                                                  ======
</TABLE>


The Company  accounts for its stock-based  compensation  plans under APB No. 25,
and as a result, no compensation  expense has been recognized in connection with
the options,  as all options  have been  granted  only to AES people,  including
Directors,  with an exercise  price equal to the market  price of the  Company's
common  stock  on the date of  grant.  The  Company  adopted  SFAS  No.  123 for
disclosure  purposes in 1996. For SFAS No. 123 purposes,  the fair value of each
option grant has been estimated as of the date of grant using the  Black-Scholes
option pricing model with the following weighted average assumptions:  risk-free
interest rate of 6.5%,  5.5%, and 7.5% and expected  volatility of 28%, 24%, and
22% for the years ended 1996,  1995 and 1994,  respectively,  a dividend  payout
rate of zero for each year and an expected  option life of 7 years.  Using these
assumptions,  the weighted  average fair value of the stock  options  granted is
$8.81 and $4.09 for 1996 and 1995, respectively.  There were no adjustments made
in  calculating  the  fair  value  to  account  for  vesting  provisions  or for
non-transferability or risk of forfeiture. 


<PAGE>


Had compensation expense been determined consistent with SFAS No. 123, utilizing
the assumptions  detailed above, the Company's net income and earnings per share
for the year ended  December 31, 1996,  1995 and 1994 would have been reduced to
the following pro forma amounts (in millions):


                               -----------------------------

                                    FOR THE YEARS ENDED
                                       DECEMBER 31,
                               -----------------------------
                                  1996       1995       1994
                               --------   --------   -------
Net Income:
 As Reported ...............    $  125     $  107     $  100
 Pro forma   ...............       121        106        100
Net income per common share:
 As Reported ...............    $ 0.81     $ 0.71     $ 0.66
 Pro forma   ...............      0.79       0.70       0.66

The use of such  amounts  and  assumptions  are not  intended  to  forecast  any
possible future  appreciation of the Company's stock price or change in dividend
policy.

In addition to the options described above, the Company has outstanding warrants
to  purchase up to 1.4  million  shares of its common  stock at $14.72 per share
through  July 2000,  which were issued as partial  settlement  of a  shareholder
class  action suit and were  expensed  in 1995.  Warrants  exercised  under this
settlement were not significant at December 31, 1996.

AES CHINA  GENERATING CO. LTD. -- During 1994,  AES Chigen  completed an initial
public offering for the sale of 10.2 million shares of Class A redeemable common
stock. Prior to the offering,  AES contributed $50 million to AES Chigen for 7.5
million  shares of Class B common  stock.  AES,  as the sole Class B holder,  is
entitled  to elect  one-half  of the board of  directors  of AES  Chigen.  As of
December 22, 1995, AES Chigen had entered into binding  commitments to invest in
excess of $50 million in power  projects in the  People's  Republic of China and
the  previously  held right of Class A  Shareholders  to  require  AES Chigen to
repurchase their shares has expired.  As a result, the Company has allocated the
net  proceeds  from the  issuance  of the Class A shares to  additional  paid-in
capital and minority interest during 1995. In November 1996, the Company and AES
Chigen   signed  a  definitive   agreement   for  the  Company  to  acquire  the
approximately  8.2  million  outstanding  Class  A  shares  of AES  Chigen.  The
acquisition  will be accomplished by amalgamating AES Chigen with a wholly owned
subsidiary  of the  Company.  Subject to  approval of the holders of the Class A
common stock, AES Chigen  shareholders will receive shares of the Company common
stock at an exchange rate of 0.29 shares of the Company's  common stock for each
share of AES Chigen common stock.

8. INCOME TAXES

INCOME  TAX  PROVISION  --  The  provision  for  income  taxes  attributable  to
continuing operations consists of the following (in millions):

                    --------------------------

                       FOR THE YEARS ENDED
                           DECEMBER 31,
                    --------------------------
                      1996      1995      1994
                    -------   -------   ------
Federal
 Current   ......   $ 19        $ 4       $ 2
 Deferred  ......     27         47        35
State
 Current   ......     12          5         4
 Deferred  ......     (2)         1         3
Foreign
 Current   ......      3         --        --
 Deferred  ......      1         --        --
                    -----       ----     ----
Total   .........   $ 60        $57       $44
                    =====       ====     ====


<PAGE>


EFFECTIVE AND STATUTORY  RATE  RECONCILIATION  -- A  reconciliation  of the U.S.
statutory  federal  income  tax rate to the  Company's  effective  tax rate as a
percentage of income before taxes (excluding  earnings and taxes from affiliates
accounted for on the equity method, and minority interests) is as follows:


                                                 -------------------------------

                                                       FOR THE YEARS ENDED
                                                            DECEMBER 31,
                                                 -------------------------------
                                                   1996        1995      1994
                                                 ---------   -------   ---------
Statutory federal tax rate   ..................     35%        35%        35%
Change in valuation allowance   ...............     (2)        (6)        (2)
State taxes, net of federal tax benefit  ......      6          6          5
Foreign taxes .................................      2         --         --
Other--net ....................................     (1)         3         (4)
                                                   ----       ----       ----
Effective tax rate  ...........................     40%        38%        34%
                                                   ====       ====       ====

DEFERRED INCOME TAXES -- Deferred income taxes relate principally to accelerated
depreciation  methods used for tax purposes and certain other expenses which are
deducted for income tax  purposes,  but not for  financial  reporting  purposes.
Deferred  income taxes reflect the net tax effects of (a) temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes,  and (b)  operating  loss
and tax credit  carryforwards.  These  items are stated at the enacted tax rates
that are  expected to be in effect when taxes are  actually  paid or  recovered.
Deferred tax assets and deferred tax liabilities are as follows (in millions):


<TABLE>
<CAPTION>
                                                               ---------------------------------

                                                                      FOR THE YEARS ENDED
                                                                          DECEMBER 31,
                                                               ---------------------------------
                                                                  1996       1995         1994
                                                               ---------   ---------   ---------
<S>                                                             <C>        <C>          <C>
Differences between book and tax basis of property and total
 deferred tax liability ....................................    $  379     $  379       $  219
Operating loss carryforwards  ..............................      (124)      (167)        (231)
Tax credit carryforwards   .................................       (97)       (71)         (68)
Other deductible temporary differences .....................       (13)        (1)         (15)
                                                                ------     -------      ------
Total gross deferred tax asset   ...........................      (234)      (239)        (314)
Less: valuation allowance  .................................        33          9          168
                                                                ------     -------      ------
Total net deferred tax asset  ..............................      (201)      (230)        (146)
                                                                ------     -------      ------
Net deferred tax liability .................................    $  178     $  149       $   73
                                                                ======     =======      ======
</TABLE>


As  of  December  31,  1996,   the  Company  had  federal  net  operating   loss
carryforwards for tax purposes of approximately  $295 million expiring from 2001
through 2010,  federal  investment tax credit  carryforwards for tax purposes of
approximately  $54 million  expiring  in years 2001  through  2006,  foreign tax
credit  carryforwards  of $3 million  expiring in 2001 and  federal  alternative
minimum tax credits of  approximately  $30 million  which  carryforward  without
expiration.

The valuation  allowance  increased during the current year by approximately $24
million to $33 million at December 31, 1996.  This increase  resulted  primarily
from the acquisition of foreign entities with certain pre-existing  deferred tax
assets, the ultimate  realization of which cannot be determined on a more likely
than not basis.  The  valuation  allowance for these  pre-existing  deferred tax
assets was recorded as acquisition  adjustments and had no effect on the current
year income tax  expense.  The $33 million  valuation  allowance at December 31,
1996 relates primarily to state and foreign tax credits, state operating losses,
and deferred tax assets,  the ultimate  realization  of which is uncertain.  The
Company believes that it is more likely than not that the remaining deferred tax
assets will be realized.


<PAGE>


The valuation  allowance  decreased during 1995 by approximately $159 million to
$9 million.  The primary reason for this decrease was the Company's  purchase of
the outstanding  debt of AES Deepwater on January 20, 1995, which had the effect
of  reducing  certain  of the  Company's  deferred  tax  assets.  The $9 million
valuation  allowance at December 31, 1995 related primarily to state tax credits
and foreign  operating losses,  the ultimate  realization of which is uncertain.
The Company believes that it is more likely than not that the remaining deferred
tax assets will be realized.

Undistributed  earnings of certain foreign affiliates  aggregated $85 million on
December 31,  1996.  The Company  considers  these  earnings to be  indefinitely
reinvested  outside of the U.S. and,  accordingly,  no U.S.  deferred taxes have
been recorded  with respect to the earnings.  Should the earnings be remitted as
dividends, the Company may be subject to additional U.S. taxes, net of allowable
foreign  tax  credits.  It is not  practicable  to  estimate  the  amount of any
additional taxes which may be payable on the undistributed earnings.

9. PROFIT SHARING AND DEFERRED COMPENSATION PLANS

PROFIT SHARING AND STOCK  OWNERSHIP PLAN -- The Company has a profit sharing and
stock ownership plan,  qualified under section 401 of the Internal Revenue Code,
which is  available  to all AES people.  The profit  sharing  plan  provides for
Company matching contributions, other Company contributions at the discretion of
the  Compensation  Committee of the Board of Directors,  and  discretionary  tax
deferred  contributions from the participants.  Participants are fully vested in
their own contributions and the Company's matching  contributions.  Participants
vest  in  other  Company   contributions   over  a  five-year  period.   Company
contributions to the plan were $4 million for each of the years ended 1996, 1995
and 1994.

DEFERRED  COMPENSATION  PLANS -- The  Company has a deferred  compensation  plan
under which directors of the Company may elect to have a portion or all of their
compensation  deferred.  The amounts  allocated to each  participant's  deferred
compensation  account may be converted into common stock units. Upon termination
or death of a participant,  the Company is required to distribute, under various
methods,  cash or the number of shares of common  stock  accumulated  within the
participant's deferred compensation account. Distribution of stock is to be made
from common stock held in treasury or from  authorized but  previously  unissued
shares.  The plan terminates and full distribution is required to be made to all
participants upon any changes of control of the Company (as defined therein).

In addition,  the Company has an executive officers' deferred compensation plan.
At the election of an executive officer, the Company will establish an unfunded,
non-qualified compensation arrangement for each officer who chooses to terminate
participation in the Company's profit sharing and employee stock ownership plan.
The  participant  may  elect to  forego  payment  of any  portion  of his or her
compensation  and have an equal amount allocated to a contribution  account.  In
addition, the Company will credit the participant's account with an amount equal
to the Company's  contributions  (both  matching and profit  sharing) that would
have been made on such  officer's  behalf if he or she had been a participant in
the profit sharing plan. The  participant  may elect to have all or a portion of
the Company's  contribution converted into stock units. Dividends paid on common
stock are allocated to the participant's account in the form of stock units. The
participant's  account balances are distributable upon termination of employment
or death.

During 1995, the Company adopted a supplemental retirement plan covering certain
AES  people.   The  plan  provides   incremental  profit  sharing  and  matching
contributions to participants that would have been paid to their accounts in the
Company's  profit sharing plan if it were not for limitations  imposed by income
tax regulations. All contributions to the plan are vested in the manner provided
in the Company's  profit sharing plan, and once vested are  nonforfeitable.  The
participant's  account balances are distributable upon termination of employment
or death.

The Company is not obligated under any post-retirement  benefit plans other than
the profit sharing and deferred compensation plans described in this Note.


<PAGE>


10. QUARTERLY DATA (UNAUDITED)

The following table summarizes the unaudited quarterly  statements of operations
(in millions, except per share amounts):

                               ---------------------------------------

                                         QUARTERS ENDED 1996
                               ---------------------------------------
                                MAR 31     JUN 30     SEP 30    DEC 31
                               -------    -------    -------   -------
Sales and services .........     $ 172      $ 174      $ 205     $ 284
Gross margin ...............        74         76         85        98
Net income   ...............        29         28         32        36
Net income per share  ......     $0.19      $0.19      $0.21     $0.23


                               ---------------------------------------

                                         QUARTERS ENDED 1995
                               ---------------------------------------
                                MAR 31     JUN 30     SEP 30    DEC 31
                               -------    -------    -------   -------
Sales and services .........     $ 169      $ 166      $ 173     $ 171
Gross margin ...............        69         69         73        74
Net income   ...............        25         27         27        28
Net income per share  ......     $0.17      $0.18      $0.18     $0.19


11. GEOGRAPHIC SEGMENTS

Information about the Company's  operations in different  geographic areas is as
follows (in millions):


                              ------------------------------

                               FOR THE YEARS ENDED
                                    DECEMBER 31,
                              ------------------------------
                                1996       1995         1994
                              ------     ------        -----
REVENUES
North America  .............    $554       $542         $523
South America  .............     146        131            2
Asia  ......................      45          1           --
Europe   ...................      90          5            8
                               -----      -----        -----
Total ......................    $835       $679         $533
                               =====      =====        =====


                            --------------------------------

                                 FOR THE YEARS ENDED
                                     DECEMBER 31,
                            --------------------------------
                               1996         1995        1994
                            -------      -------      ------
OPERATING INCOME
North America  ............    $258         $251       $ 245
South America  ............      21           14          --
Asia  .....................      (9)          (8)        (11)
Europe   ..................       8           (4)          2
                              -----        -----       -----
Total .....................    $278         $253       $ 236
                              =====        =====       =====


<PAGE>


                        -----------------------------

                             FOR THE YEARS ENDED
                                 DECEMBER 31,
                        -----------------------------
                            1996       1995      1994
                        --------   --------   -------
IDENTIFIABLE ASSETS
North America  ......     $1,831     $1,693    $1,569
South America  ......        683        230        46
Asia  ...............        744        328       221
Europe   ............        364         90        79
                         -------    -------   -------
Total ...............     $3,622     $2,341    $1,915
                         =======    =======   =======

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated  fair values of the  Company's  assets and  liabilities  have been
determined using available market information. The estimates are not necessarily
indicative  of the  amounts  the  Company  could  realize  in a  current  market
exchange.   The  use  of  different   market   assumptions   and/or   estimation
methodologies may have a material effect on the estimated fair value amounts.

The fair value of current financial assets,  current  liabilities,  debt service
reserves and other  deposits,  and other assets are assumed to be equal to their
reported carrying amounts. The fair value of project financing debt is estimated
differently based upon the type of loan. For variable rate loans, carrying value
approximates fair value. For fixed rate loans, the fair value is estimated using
discounted  cash  flow  analyses  based  on the  Company's  current  incremental
borrowing  rates at which  similar  borrowing  arrangements  would be made under
current conditions, or by the estimated discount rate a prospective seller would
pay to a credit-worthy third party to assume the obligations. The carrying value
and fair value of the AES  Placerita  capital lease have been excluded from this
disclosure.  The fair value of swap  agreements is the estimated net amount that
the Company would pay to terminate the agreements at the balance sheet date. The
estimated  fair  values of the  Debentures,  9 3/4%  Notes and 10 1/4% Notes are
based on the quoted market prices at December 31, 1996 and 1995.

The estimated fair values of the Company's financial instruments at December 31,
1996 and 1995 are as follows (in millions):

                           --------------------------------------------------

                                               1996                      1995
                           ------------------------   -----------------------
                            CARRYING                   CARRYING
                              AMOUNT     FAIR VALUE      AMOUNT   FAIR VALUE
                           ---------   ------------   ---------   -----------
Project financing debt  ... $1,562        $1,562        $1,071      $1,078
Other notes payable  ......    538           560           175         180
Interest rate swaps  ......     --            68            --         137

The fair value  estimates  presented  herein are based on pertinent  information
available  as of  December  31,  1996 and 1995.  The Company is not aware of any
factors that would  significantly  affect the estimated fair value amounts since
that date.


13. SUBSEQUENT EVENTS

On June 30, 1997, AES acquired the international  assets of Destec Energy,  Inc.
("Destec") for approximately  $430 million.  The purchase includes five electric
generating  plants and a number of power  projects  in  development.  The plants
acquired by AES (with  ownership  percentages in  parenthesis)  include a 110 MW
gas-fired  combined  cycle plant in Kingston,  Canada (50%);  a 405 MW gas-fired
combined cycle plant in Terneuzen,  Netherlands (50%); a 140 MW gas-fired simple
cycle plant in Cornwall,  England (100%);  a 235 MW oil-fired simple cycle plant
in Santo Domingo,  Dominican  Republic (99%);  and a 1600 MW coal-fired plant in
Victoria, Australia (20%).


In May 1997, the Company and its partner,  CEA acquired an aggregate of 90% (AES
acquired 60% and CEA acquired 30%) of two  integrated  electricity  companies of
ESEBA serving certain portions of the province of Buenos Aires, Argentina for an
aggregate purchase price of $565 million. The remaining 10% will be owned by the
employees of each of the two acquired companies.


<PAGE>


On May 8, 1997,  AES completed its  amalgamation  with AES China  Generating Co.
Ltd.  (see  Note  7).  As  a  result  of  the   amalgation  the  Company  issued
approximately  5.0 million shares of AES Common Stock in exchange for all of the
outstanding AES Chigen Class A Common Stock.

In May 1997,  AES through a consortium  agreed to acquire  approximately  13% of
CEMIG, an integrated  electric  utility service in the State of Minas Gerais for
approximately  $1 billion.  These shares also represent a 33% voting interest in
CEMIG.

On October 27,  1997,  AES  acquired  certain  distribution  assets of CEEE,  an
integrated  electric  utility  service  in the state of Rio do Sol  Brazil,  for
approximately $1.37 billion. 




<PAGE>

                                 EXHIBIT INDEX

Exhibit
No.

(b) Exhibits:


23.1 Consent of Deloitte & Touche LLP.
[{"type": "8-K", "sequence": "1", "description": "FORM 8-K", "secsgml_size_bytes": 85906}]
{"company-data": {"conformed-name": "AES CORPORATION", "cik": "0000874761", "assigned-sic": "4991", "irs-number": "541163725", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "001-12291", "film-number": "97709043"}, "business-address": {"street1": "1001 N 19TH ST", "street2": "STE 2000", "city": "ARLINGTON", "state": "VA", "zip": "22209", "phone": "7035221315"}}
SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT

                       PURSUANT TO SECTION 13 OR 15 (D) OF

                       THE SECURITIES EXCHANGE ACT OF 1934

       Date of Report (date of earliest event reported): November 6, 1997

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

       DELAWARE                   333-15487                    54-1163725
     (State  of               (Commission File No.)           (IRS Employer 
    Incorporation)                                         Identification No.)

                       1001 North 19th Street, Suite 2000
                            Arlington, Virginia 22209
          (Address of principal executive offices, including zip code)

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

                                 NOT APPLICABLE

          (Former Name or Former Address, if changed since last report)
Item  5.  OTHER EVENTS

          This  current  report on Form 8-k includes  The AES  Corporation  1996
          consolidated  financial  statements  updated  for  certain  subsequent
          events  filed  under Item 7, together with the  Independent  Auditors'
          Report on the financial statements.

Item  7.  FINANCIAL STATEMENTS & EXHIBITS

         a. (ii)  The Company's  consolidated  balance sheets as of December 31,
                  1996   and 1995,  and the related  consolidated  statements of
                  operations  and cash flows for the three years ended  December
                  31, 1996, 1995 and 1994, and related notes thereto.
Independent Auditors' Report

   
To the Stockholders
of The AES Corporation:
    

We  have  audited  the  accompanying  consolidated  balance  sheets  of The  AES
Corporation  and  subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations and cash flows for each of the three years
in the period ended  December  31,  1996.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material   respects,   the  financial   position  of  The  AES  Corporation  and
subsidiaries at December 31, 1996 and 1995, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1996 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

   
Washington, DC
January 30, 1997,  except for the  penultimate  paragraph of Note 6, as to which
the date is March 13, 1997, the pre-penultimate paragraph of Note 6, as to which
the date is August 8, 1997,  the  subsequent  events  paragraph of Note 7, as to
which the date is July 15,  1997,  and Note 13, as to which the date is  October
27, 1997
THE AES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
                                                                                             -------------------------
                                                                                               1996           1995
In millions, except par values                                                               ----------   ------------
ASSETS
Current Assets:
 Cash and cash equivalents ...............................................................   $  185        $  239
 Short-term investments ..................................................................       20            58
 Accounts receivable, net  ...............................................................       95            54
 Inventory  ..............................................................................       81            36
 Receivable from affiliates   ............................................................        9            11
 Deferred income taxes  ..................................................................       65            21
 Prepaid expenses and other current assets   .............................................       47            27
                                                                                             -------       -------
Total current assets .....................................................................      502           446
Property, Plant and Equipment:
 Land ....................................................................................       30             9
 Electric and steam generating facilities ................................................    1,884         1,594
 Furniture and office equipment  .........................................................       14            11
 Accumulated depreciation and amortization   .............................................     (282)         (222)
 Construction in progress  ...............................................................      574           158
                                                                                             -------       -------
Property, plant and equipment, net  ......................................................    2,220         1,550
Other Assets:
 Deferred costs, net .....................................................................       47            32
 Project development costs ...............................................................       53            41
 Investments in and advances to affiliates   .............................................      491            48
 Debt service reserves and other deposits ................................................      175           168
 Goodwill & other intangible assets, net  ................................................       52            37
 Other assets  ...........................................................................       82            19
                                                                                             -------       -------
Total other assets   .....................................................................      900           345
                                                                                             -------       -------
Total ....................................................................................   $3,622        $2,341
                                                                                             =======       =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 Accounts payable ........................................................................   $   64        $   33
 Accrued interest ........................................................................       25            12
 Accrued and other liabilities   .........................................................       95            49
 Other notes payable -- current portion   ................................................       88            50
 Project financing debt -- current portion   .............................................      110            84
                                                                                             -------       -------
Total current liabilities  ...............................................................      382           228
Long-Term Liabilities:
 Project financing debt ..................................................................    1,558         1,098
 Other notes payable .....................................................................      450           125
 Deferred income taxes  ..................................................................      243           170
 Other long-term liabilities  ............................................................       55            13
                                                                                             -------       -------
Total long-term liabilities   ............................................................    2,306         1,406
Minority Interest ........................................................................      213           158
Commitments and Contingencies ............................................................       --            --
Stockholders' Equity:
Preferred stock (no par value; 2 million shares authorized; none issued)   ...............       --            --
Common stock ($.01 par value; 500 million shares authorized; shares issued
  and outstanding: 1996
 -- 154.8 million; 1995 -- 149.6 million) ................................................        1             1
Additional paid-in capital ...............................................................      360           293
Retained earnings ........................................................................      396           271
Cumulative foreign currency translation adjustment .......................................      (33)          (10)
Less treasury stock at cost (1996 -- .2 million shares; 1995 -- .6 million shares)  ......       (3)           (6)
                                                                                             -------       -------
Total stockholders' equity ...............................................................      721           549
                                                                                             -------       -------
Total ....................................................................................   $3,622        $2,341
                                                                                             =======       =======
See Notes to Consolidated Financial Statements.
THE AES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31,
                                                                            ---------------------------------
                                                                               1996        1995        1994
In millions, except per share amounts                                       ---------   ---------   ---------
REVENUES:
 Sales ..................................................................    $  824      $  672      $  514
 Services ...............................................................        11           7          19
                                                                             ------      ------      ------
Total revenues  .........................................................       835         679         533
OPERATING COSTS AND EXPENSES:
 Cost of sales  .........................................................       495         388         252
 Cost of services  ......................................................         7           6          13
 Selling, general and administrative expenses ...........................        35          32          32
 Provision to reduce contract receivable   ..............................        20          --          --
                                                                             ------      ------      ------
Total operating costs and expenses   ....................................       557         426         297
                                                                             ------      ------      ------
Operating Income   ......................................................       278         253         236
OTHER INCOME AND (EXPENSE):
 Interest expense  ......................................................      (144)       (127)       (125)
 Interest income   ......................................................        24          27          22
 Equity in earnings of affiliates (net of income tax)  ..................        35          14          12
                                                                             ------      ------      ------
INCOME BEFORE INCOME TAXES,
 MINORITY INTEREST,
 AND EXTRAORDINARY ITEM  ................................................       193         167         145
INCOME TAXES ............................................................        60          57          44
MINORITY INTEREST  ......................................................         8           3           3
                                                                             ------      ------      ------
INCOME BEFORE EXTRAORDINARY ITEM  .......................................       125         107          98
Extraordinary item -- net gain on extinguishment of debt (less applicable
 income taxes of $1)  ...................................................        --          --           2
                                                                             ------      ------      ------
NET INCOME   ............................................................    $  125      $  107      $  100
                                                                             ======      ======      ======
NET INCOME PER SHARE:
 Before extraordinary gain  .............................................    $ 0.81      $ 0.71      $ 0.65
 Extraordinary gain   ...................................................        --          --        0.01
                                                                             ------      ------      ------
NET INCOME PER SHARE  ...................................................    $ 0.81      $ 0.71      $ 0.66
                                                                             ======      ======      ======
Note: All per share amounts have been adjusted for the 2 for 1 stock split
      effective July 28, 1997.

                 See Notes to Consolidated Financial Statements.
THE AES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
                                                                                    DECEMBER 31,
                                                                     ----------------------------------------
                                                                           1996          1995         1994
In millions, except per share amounts                                -------------   -----------   ----------
OPERATING ACTIVITIES:
Net income  ......................................................    $    125        $  107       $  100
Adjustments to net income: .......................................
 Depreciation and amortization   .................................          65            55           43
 Provision for deferred taxes ....................................          26            48           39
 Undistributed earnings of affiliates  ...........................         (20)            3           (3)
 Payments for deferred financing costs ...........................         (13)           (3)          (6)
 Other   .........................................................           6             4           --
 Changes in working capital   ....................................          (7)          (17)          (9)
                                                                      ---------       -------      -------
Net cash provided by operating activities ........................         182           197          164
INVESTING ACTIVITIES:
Property additions   .............................................        (506)         (171)         (10)
Acquisitions, net of cash acquired  ..............................        (148)         (121)          --
Sale of short-term investments   .................................         103           254          132
Purchase of short-term investments  ..............................         (66)         (218)        (204)
Affiliate advances and investments  ..............................        (430)          (10)          --
Project development costs  .......................................         (16)          (22)         (17)
Debt service reserves and other assets ...........................         (72)          (55)         (21)
                                                                      ---------       -------      -------
Net cash used in investing activities  ...........................      (1,135)         (343)        (120)
FINANCING ACTIVITIES:
Net borrowings (repayments) under the revolver  ..................         163            50           --
Issuance of project financing debt and other notes payable  ......         802           133           --
Repayments of project financing debt   ...........................         (75)          (63)         (72)
Other liabilities ................................................          (3)            8           --
Contributions by minority interests ..............................          10             7          152
Sale (repurchase) of common stock   ..............................           2            (5)          --
                                                                      ---------       -------      -------
Net cash provided by financing activities ........................         899           130           80
INCREASE/(DECREASE) IN CASH AND CASH
 EQUIVALENTS   ...................................................         (54)          (16)         124
CASH AND CASH EQUIVALENTS, BEGINNING   ...........................         239           255          131
                                                                      ---------       -------      -------
CASH AND CASH EQUIVALENTS, ENDING   ..............................    $    185        $  239       $  255
                                                                      =========       =======      =======
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest .......................................    $    134        $  120       $  127
Cash payments for income taxes   .................................          32             6            3
See Notes to Consolidated Financial Statements.
THE AES CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The AES Corporation and its subsidiaries and affiliates  (collectively  "AES" or
the "Company") is a global power company primarily engaged in developing, owning
and operating electric power generating facilities.

PRINCIPLES OF  CONSOLIDATION  -- The  consolidated  financial  statements of the
Company include the accounts of AES, its subsidiaries and controlled affiliates.
Investments  in 50% or less  owned  affiliates  over which the  Company  has the
ability to exercise  significant  influence,  but not control, are accounted for
using the equity  method.  The accounts of AES China  Generating  Co. Ltd. ("AES
Chigen"),  a controlled  affiliate,  are  consolidated  based on its fiscal year
ended November 30. Intercompany transactions and balances have been eliminated.

CASH AND CASH  EQUIVALENTS -- The Company  considers  cash on hand,  deposits in
banks,  certificates  of deposit and short-term  marketable  securities  with an
original maturity of three months or less as cash and cash equivalents.

INVESTMENTS  --  Securities  that the Company has both the  positive  intent and
ability to hold to maturity are classified as  held-to-maturity  and are carried
at historical cost.  Other  investments that the Company does not intend to hold
to maturity are classified as  available-for-sale,  and any unrealized  gains or
losses are recorded as a separate  component of stockholders'  equity.  Interest
and  dividends  on  investments  are  reported  in interest  income.  Short-term
investments  consist of investments with original  maturities in excess of three
months but less than one year. Debt service  reserves and other deposits,  which
might  otherwise  be  considered  cash  and  cash  equivalents  are  treated  as
noncurrent assets (see Note 3).

INVENTORY --  Inventory,  valued at the lower of cost or market (first in, first
out method), consists of coal, raw materials, spare parts, and supplies.
Inventory consists of the following (in millions):

                                              --------------

                                               DECEMBER 31,
                                              --------------
                                                1996    1995
                                              ------   -----
Coal and other raw materials   ............     $57     $ 24
Spare parts, materials and supplies  ......      24       12
                                                  -        -
Total  ....................................     $81     $ 36
                                               ====     =====

PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated at cost
including the cost of improvements. Depreciation, after consideration of salvage
value, is computed using the straight-line  method over the estimated  composite
lives of the assets, which range from 3 to 40 years. Maintenance and repairs are
charged to expense as incurred.  Emergency and rotable  spare parts  inventories
are included in electric and steam  generating  facilities  and are  depreciated
over the useful life of the related components.

INTANGIBLE  ASSETS -- Goodwill and other  intangible  assets are  amortized on a
straight-line  basis over their estimated  periods of benefit or their estimated
lives,  which range from 30 to 40 years.  Intangible assets at December 31, 1996
and 1995 are shown net of accumulated amortization of $3 million and $1 million,
respectively.   The  Company  will  review  its  goodwill  and  intangibles  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be recoverable.

CONSTRUCTION IN PROGRESS -- Construction  progress payments,  engineering costs,
insurance  costs,  wages,  interest and other costs relating to  construction in
progress are capitalized.  Construction in progress  balances are transferred to
electric  and steam  generating  facilities  when the assets are ready for their
intended use. Interest  capitalized during development and construction  totaled
$27 million, $8 million and $2 million in 1996, 1995 and 1994, respectively.

DEFERRED  COSTS  --  Financing  costs  are  deferred  and  amortized  using  the
straight-line  method over the related financing  period,  which does not differ
materially from the effective  interest method of  amortization.  Deferred costs
are shown net of  accumulated  amortization  of $36  million and $31 million for
1996 and 1995, respectively.
PROJECT DEVELOPMENT COSTS -- The Company capitalizes the costs of developing new
projects.  These costs represent  amounts  incurred for  professional  services,
salaries, permits, options, capitalized interest and other related direct costs.
These  costs are  included  in  investments  in  affiliates,  or  property  when
financing is  obtained,  or expensed at the time the Company  determines  that a
particular project will no longer be developed.  The continued capitalization is
subject to on-going  risks related to  successful  completion,  including  those
related to political, siting, financing,  construction,  permitting and contract
compliance.  Certain reimbursable costs related to one of the projects have been
classified as other assets at December 31, 1996.

FOREIGN CURRENCY  TRANSLATION -- Foreign  subsidiaries and affiliates  translate
their assets and liabilities  into U.S. dollars at the current exchange rates in
effect at the end of the fiscal  period.  The gains or losses  that  result from
this  process,  and gains  and  losses on  intercompany  transactions  which are
long-term  in nature,  and which the Company does not intend to  repatriate  are
shown in the cumulative foreign currency  translation  adjustment balance in the
stockholders'  equity  section of the  balance  sheet.  The  revenue and expense
accounts of foreign subsidiaries and affiliates are translated into U.S. dollars
at the average exchange rates that prevailed during the period.

REVENUE  RECOGNITION AND  CONCENTRATION -- Revenues from the sale of electricity
and steam are recorded  based upon output  delivered  and  capacity  provided at
rates as specified under contract terms. Most of the Company's power plants rely
primarily on one power sales contract with a single customer for the majority of
its  revenues.  Five  customers  accounted  for 20%,  16%,  16%,  11% and 10% of
revenues in 1996, four customers accounted for 24%, 18%, 18% and 13% of revenues
in 1995, and four  customers  accounted for 31%, 23%, 22% and 11% of revenues in
1994. The prolonged failure of any of these customers to fulfill its contractual
obligations  could have a  substantial  negative  impact on AES's  revenues  and
profits.  However,  the  Company  does  not  anticipate  non-performance  by the
customers under these contracts.

INTEREST RATE SWAP AND CAP  AGREEMENTS -- The Company  enters into interest rate
swap and cap  agreements as a hedge  against  interest rate exposure on floating
rate project  financing debt. The  transactions are accounted for as a hedge and
interest  is  expensed  or  capitalized,  as  appropriate,  using the  effective
interest rates. Any fees or payments are amortized as yield  adjustments.  These
derivative financial instruments are classified as other than trading.

NET INCOME PER SHARE -- Net  income per share is based on the  weighted  average
number of common stock and common stock  equivalents  outstanding,  after giving
effect to stock splits and stock dividends. Common stock equivalents result from
dilutive stock options,  warrants and deferred  compensation  arrangements.  The
effect of such  common  stock  equivalents  on net income per share is  computed
using the treasury  stock  method.  The shares used in computing  net income per
share were 154.6 million,  151.8 million,  and 151.6 million for 1996,  1995 and
1994,   respectively.   Primary  and  fully  diluted   earnings  per  share  are
approximately the same.

NEW ACCOUNTING  PRONOUNCEMENTS  -- Statement of Financial  Accounting  Standards
(SFAS) No. 128 "Earnings  Per Share," was issued in early 1997.  SFAS No. 128 is
effective for periods  ending after  December 15, 1997 and early adoption is not
permitted.  SFAS No. 128 requires  the Company to compute and present  basic and
diluted  earnings  per share.  Had the Company  computed  earnings  per share in
accordance  with SFAS No. 128 the basic and diluted  amounts  would have been as
follows:

                                     --------------------------

                                      YEARS ENDED DECEMBER 31,
                                     --------------------------
                                        1996      1995     1994
                                     -------   -------   ------

Basic earnings per share .........    $ .83     $ .72     $ .67
Diluted earnings per share  ......    $ .80     $ .70     $ .66

USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates. Actual
results could differ from those estimates.

RECLASSIFICATIONS  -- Certain  reclassifications  have been made to prior period
amounts to conform with the 1996 presentation.
2. ACQUISITIONS

In March 1996,  the  Company,  through a  subsidiary  acquired a 98% interest in
Hidrot-rmica San Juan,  S.A., ("AES San Juan"),  which is the owner and operator
of a 78 megawatt Power Supply  Business in the province of San Juan,  Argentina.
The facility, which sells electricity into the Argentine spot market, includes a
45 megawatt hydroelectric power plant and a 33 megawatt gas combustion plant. As
a result of this  acquisition,  the Company  acquired  intangible  assets of $17
million which are being amortized over the life of the hydroelectric  concession
of 30 years.

In May 1996, AES, through certain subsidiaries,  acquired for approximately $393
million,  common shares  representing  an 11.35%  interest in Light  Servi-os de
Electricidade  S. A.  ("Light"),  a  publicly-held  Brazilian  corporation  that
operates as the  concessionaire  of an approximately  3,800 megawatt  integrated
electric power generation, transmission and distribution system which serves Rio
de  Janeiro,  Brazil.  The AES  subsidiary  which owns an  interest  in Light is
participating in a consortium established through a shareholders' agreement that
owns a 50.44% controlling  interest. As a result, the Company has the ability to
exert  significant  influence over the operation of Light,  and is recording its
investment using the equity method.

In August  1996,  the  Company,  through a  subsidiary,  acquired a  controlling
interest in three power  plants  totaling  1,281 MW and a coal mine  through the
purchase  of an 81% share of Tiszai  Eromu Rt.  ("AES  Tiszai")  an  electricity
generation company in Hungary for $110 million, and in December 1996 acquired an
additional 13% for $17 million.

Also, in August 1996,  the Company  acquired,  through a subsidiary,  a majority
controlling interest in a 4,000 megawatt coal-fired facility in Kazakstan, ("AES
Ekibastuz"),  for  approximately  $3  million.  The  facility  sells  power to a
government-owned  utility  under a 35 year  power  purchase  agreement.  Through
December 31, 1996,  approximately  $35 million  (excluding  VAT) has been billed
under the power sales contract for electricity  delivered of which the purchaser
has paid  approximately $5 million.  The Company has recorded a provision of $20
million to reduce the carrying value of the contract  receivable at December 31,
1996 to $10 million. As of December 31, 1996, the net assets of the project were
$24  million,  a portion of which was  represented  by the  contract  receivable
referred to above.  There can be no assurance as to the ultimate  collectibility
of amounts owed to AES as of December 31, 1996 or additional  amounts related to
future deliveries of electricity under the power sales contract.

In January 1995, a subsidiary of the Company acquired the remaining  outstanding
debt of AES Deepwater, a 140 megawatt cogeneration plant in Pasadena, Texas, for
$65 million from a syndicate of lenders. Prior to that date, the Company did not
maintain or exercise  control or significant  influence over the  utilization of
the AES Deepwater facility,  and accordingly,  recorded its investment using the
cost  method.   The  acquisition   resulted  in  the  creation  of  goodwill  of
approximately $24 million which is being amortized over the remaining  estimated
life of the plant.

In June and July 1995,  a  subsidiary  of the Company  increased  its  ownership
interest  in Central  T-rmica  San  Nicolas,  S. A. ("AES San  Nicolas"),  a 650
megawatt power plant located in San Nicolas, Argentina from approximately 34% to
approximately   69%  by  purchasing   the  interests  of  two  former   minority
shareholders.  The  1995  purchase  price  was  $24  million.  The  net  results
attributable to the Company's non-owned portion of earnings from AES San Nicolas
in 1995 is reflected as minority interest.

In addition,  in December  1995,  another  subsidiary  of the Company  purchased
Hidroel-ctrica   Rio  Juramento  S.A.  ("AES  Rio  Juramento")  a  112  megawatt
hydroelectric  system in the province of Salta,  Argentina for $43 million. As a
result  of this  acquisition,  the  Company  acquired  intangible  assets of $14
million which are being amortized over the life of the hydroelectric  concession
of 30 years.

These  acquisitions  were  accounted  for  as  purchases.   The  purchase  price
allocations  for Light,  AES Tiszai and AES Ekibastuz  have been  completed on a
preliminary basis, subject to adjustments resulting from new or additional facts
that may come to light when the engineering,  environmental,  and legal analyses
are  completed  during  the  allocation  period.   The  accompanying   financial
statements  include the operating results of AES Tiszai from August 1, 1996, the
operating  results of AES Ekibastuz from August 10, 1996,  equity  earnings from
Light  from June 10,  1996,  and the  operating  results of AES  Deepwater  from
January 20, 1995, the operating  results of AES San Nicolas from January 1, 1995
and the  operating  results of AES Rio  Juramento  from  December  1, 1995.  The
following table presents supplemental unaudited proforma operating results as if
all of the  acquisitions  had occurred at the  beginning  of 1995 (in  millions,
except per share amounts):
-----------------

                                                                         FOR THE YEARS
                                                                             ENDED
                                                                          DECEMBER 31,
                                                                       -----------------
                                                                          1996      1995
                                                                       -------    ------
Revenues   .........................................................    $1,013     $ 892
Net income .........................................................       100        91
Earnings per share  ................................................    $ 1.29     $1.20
The pro forma results are based upon assumptions and estimates which the Company
believes are  reasonable.  The pro forma results do not purport to be indicative
of the results  that  actually  would have been  obtained  had the  acquisitions
occurred on January 1, 1995,  nor are they intended to be a projection of future
results.

3. INVESTMENTS

AT DECEMBER 31, 1996 AND 1995,  THE  COMPANY'S  INVESTMENTS  WERE  CLASSIFIED AS
EITHER HELD-TO-MATURITY OR AVAILABLE-FOR-SALE.  THE amortized cost and estimated
fair value of the  investments  at  December  31,  1996 and 1995  classified  as
held-to-maturity and available-for-sale were approximately the same.

The  short-term  investments  and debt service  reserves and other deposits were
invested as follows (in millions):
---------------

                                                                          DECEMBER 31,
                                                                        ---------------
                                                                          1996     1995
                                                                        -------   -----
Restricted cash and cash equivalents   ..............................     $104     $144
Held-to-maturity US treasury and government agency securities  ......        1       33
Foreign certificates of deposit  ....................................       --        3
Commercial paper  ...................................................       39        3
Floating rate notes  ................................................       --        6
                                                                         -----    -----
Subtotal ............................................................       40       45
Available-for-sale:
US treasury and government agency securities ........................       43       30
Certificates of deposit .............................................        3        4
Commercial paper  ...................................................        5       --
Foreign certificates of deposit  ....................................       --        3
                                                                         -----    -----
Subtotal ............................................................       51       37
                                                                         -----    -----
Total ...............................................................     $195     $226
                                                                         =====    =====
Short-term  investments  classified as held-to-maturity  and  available-for-sale
were $9 and $11 million,  respectively, at December 31, 1996 and $44 million and
$14 million, respectively, at December 31, 1995.
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES

The following table presents summarized financial  information (in millions) for
equity method affiliates on a combined 100% basis. Amounts presented include the
accounts of NIGEN,  Ltd. (47% owned UK affiliate),  Medway Power Ltd. (25% owned
UK  affiliate),  Light  (11.35%  owned  Brazilian  affiliate)  and AES  Chigen's
affiliates  at December 31, 1996,  and for the year then ended,  the accounts of
NIGEN,  Ltd.  and Medway  Power Ltd. at  December  31, 1995 and 1994 and for the
years  then  ended,  and  the  accounts  of San  Nicolas  (34%  owned  Argentine
affiliate) at December 31, 1994 and for the year then ended.

                                 ---------------------------

                                    1996      1995      1994
                                  ------   -------    ------
Sales ........................    $1,960      $276     $ 335
Operating income  ............       498        86        75
Net income  ..................       383        49        33
Current assets ...............       891       171       156
Noncurrent assets ............     4,928       949     1,030
Current liabilities  .........       868        70       133
Noncurrent liabilities  ......     2,111       973       945
Stockholders' equity .........     2,840        77       108

In 1994, NIGEN, Ltd. refinanced its outstanding project financing loan through a
public  debenture  offering.  The  extinguishment  of such debt  resulted  in an
extraordinary loss of $7 million. The Company's share, $2 million, net of taxes,
is included in the accompanying financial statements as an extraordinary loss.

The  Company's  share  of  undistributed  earnings  of  affiliates  included  in
consolidated  retained  earnings was $33 million and $13 million at December 31,
1996 and 1995, respectively.  The Company charged and recognized management fees
and  interest on advances to its  affiliates  which  aggregated  $9 million,  $8
million and $18 million for each of the years ended December 31, 1996,  1995 and
1994, respectively.

5. DEBT

PROJECT  FINANCING DEBT -- Project  financing debt at December 31, 1996 and 1995
consisted of the following (in millions):
--------------------------------------------------

                                              INTEREST
                                                RATE
                                             @ 12/31/96     FINAL MATURITY     1996       1995
                                            ------------   ----------------  ------     ------
SENIOR DEBT--FLOATING
AES Beaver Valley   .....................        7.4%            1998         $  21      $  33
AES Thames ..............................        6.8%            2004           163        181
AES Shady Point  ........................        7.4%            2004           306        320
AES Barbers Point   .....................        6.5%            2007           325        340
AES Lal Pir   ...........................        5.0%            2008           135         28
AES Pak Gen   ...........................        5.1%            2010            90         --
AES Coral Reef   ........................       10.1%            2003           168         --
AES Warrior Run  ........................        6.7%            2014            37         22
Other   .................................       10.4%            2001             8         --
SENIOR DEBT--FIXED
AES Placerita--capital lease ............        8.1%            2009           105        111
AES Warrior Run--tax exempt bonds  ......        7.4%            2019            74         74
AES Pak Gen   ...........................        4.3%            2007            85         --
AES San Nicolas  ........................       10.4%            2000            80         --
Subordinated Debt   .....................       13.6%            2010            71         73
                                                                             ------     ------
Subtotal   ..............................                                     1,668       1182
Less current maturities   ...............                                      (110)       (84)
                                                                             ------     ------
Total   .................................                                    $1,558     $1,098
                                                                             ======     ======
Project  financing debt borrowings are primarily  collateralized  by the capital
stock of the project  subsidiary,  the physical  assets of such facility and all
project agreements associated with such facility.

In 1994, the Company purchased and retired  subordinated  project financing debt
and accrued interest at AES Placerita,  resulting in an extraordinary gain of $4
million, net of taxes.

The Company has interest rate swap agreements in an aggregate notional principal
amount of $550  million at December 31, 1996.  The swap  agreements  effectively
change the  interest  rate on the  portion of the debt  covered by the  notional
amounts,  to a weighted  average fixed rate ranging from  approximately  9.5% to
10.5%.  The  agreements  expire at various  dates from 1997 through 2007. In the
event of nonperformance by the  counterparties,  the subsidiaries may be exposed
to  increased  interest  rates,   however,   the  Company  does  not  anticipate
nonperformance  by  the  counterparties,   which  are  multinational   financial
institutions.  At December 31, 1996,  subsidiaries  of the Company have interest
rate cap agreements at a ceiling of  approximately  12.5% with  remaining  terms
ranging from three to six years in an aggregate notional amount of $280 million.

AES Shady Point and AES Barbers Point have issued  commercial paper supported by
irrevocable letters of credit issued by multinational financial institutions. In
the event of nonperformance or credit  deterioration of these institutions,  the
Company  may be  exposed to the risk of higher  effective  interest  rates.  The
Company does not believe that such  nonperformance  or credit  deterioration  is
likely.

OTHER  NOTES  PAYABLE -- Other  notes  payable  at  December  31,  1996 and 1995
consisted of the following (in millions):
---------------------------------------------------

                                               INTEREST RATE
                                                @ 12/31/96      FINAL MATURITY    1996      1995
                                              --------------   ---------------- ------    ------
Corporate revolving bank loan(1)  .........        7.40%             1998         $213      $ 50
Senior subordinated notes   ...............        9.75%             2000           75        75
Convertible subordinated debentures  ......        6.50%             2002           --        50
Senior subordinated notes   ...............       10.25%             2006          250        --
                                                                                 -----     -----
 Subtotal .................................                                        538       175
Less current maturities  ..................                                        (88)      (50)
                                                                                 -----     -----
 Total ....................................                                       $450      $125
                                                                                 =====     =====
----------
(1) Floating rate loan.

Under the terms of the $425 million corporate  revolving bank loan and letter of
credit facility  ("Revolver"),  the Company must reduce its direct borrowings to
$125  million  for 30  consecutive  days  annually to obtain  additional  loans.
Commitment  fees on the unused portion at December 31, 1996 are .375% per annum,
and as of that date $89  million  was  available.  The  Company's  9 3/4% senior
subordinated  notes due 2000 ("9 3/4%  Notes)  and 10 1/4%  senior  subordinated
notes  due 2006 ("10 1/4%  Notes")  are  general  unsecured  obligations  of the
Company. The 9 3/4% Notes are redeemable at the Company's option, in whole or in
part,  beginning  June  1997  at  redemption  prices  in  excess  of par and are
redeemable at par beginning  June 1999.  The 10 1/4% Notes are redeemable at the
Company's option, in whole or in part,  beginning July 2001 at redemption prices
in excess of par and are  redeemable at par beginning  July 2003.  The Company's
convertible  subordinated  debentures  ("Debentures") were converted into common
stock of the Company at the rate of $26.16 per common share on August 30, 1996.
FUTURE  MATURITIES OF DEBT -- Scheduled  maturities of total  long-term  debt at
December 31, 1996 are (in millions):

         1997  ............   $  198
         1998  ............      132
         1999  ............      303
         2000  ............      269
         2001  ............      202
         Thereafter  ......    1,102
                             -------
         Total ............   $2,206
                             =======

COVENANTS -- The terms of the Company's  Revolver,  9 3/4% Notes, 10 1/4% Notes,
and project financing debt agreements  contain certain covenants and provisions.
The covenants  provide for, among other items,  maintenance of certain reserves,
and  require  that  minimum  levels of working  capital,  net worth and  certain
financial ratio tests are met. The most  restrictive of these covenants  include
limitations  on  incurring  additional  debt and on the payment of  dividends to
shareholders.

The project financing debt limitations of AES's subsidiaries  permit the payment
of  dividends  to the parent  company  out of current  cash flow for  quarterly,
semi-annual  or annual  periods  only at the end of such  periods and only after
payment  of  principal  and  interest  on  project  loans due at the end of such
periods. As of December 31, 1996,  approximately $63 million was available under
project loan documents for distribution by U.S. subsidiaries.

AES CHIGEN NOTES --  Subsequent  to its fiscal year end, AES Chigen  issued $180
million of 10 1/8% Notes due 2006.

6. COMMITMENTS AND CONTINGENCIES

As of December  31,  1996,  the Company and its  consolidated  subsidiaries  are
obligated under long-term  non-cancelable operating leases, primarily for office
rental and site leases.  Rental expense for operating leases was $4 million,  $3
million and $2 million in the years ended 1996, 1995 and 1994, respectively. The
future minimum lease commitments under these leases are $6 million each year for
1997 and 1998, $5 million for 1999, $2 million each year for 2000 and 2001,  and
$56 million for the years thereafter.

Operating subsidiaries of the Company enter into various long-term contracts for
the  purchase  of  fuel  subject  to   termination   only  in  certain   limited
circumstances. These contracts have remaining terms of 3 to 11 years.

GUARANTEES -- In connection with certain of its project financing,  acquisition,
disposition, and power purchase agreements, AES has expressly undertaken limited
obligations  and  commitments  most of which will only be  effective  or will be
terminated  upon  the  occurrence  of  future  events.   These  obligations  and
commitments,  excluding  letter  of credit  obligations  discussed  below,  were
limited as of December 31, 1996, by the terms of the agreements, to an aggregate
of  approximately  $176  million.  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 $33
million as of December 31, 1996.

LETTERS OF CREDIT -- At December 31, 1996 and 1995, the Company had $123 million
and $56 million, respectively, of letters of credit outstanding under its credit
facility  which  operate to guarantee  performance  relating to certain  project
development activities and subsidiary  operations.  The Company pays a letter of
credit fee of 1.75% on the outstanding amounts.

LITIGATION -- On February 25, 1993, an action was filed,  jointly and severally,
in the 10th  Judicial  District  Court,  Galveston  County,  Texas  against  the
Company, over 25 other corporations (including major oil refineries and chemical
companies)  and  utilities,  a utility  district,  four Texas  cities,  McGinnes
Industrial  Maintenance  Corporation,  Roland  McGinnes and  Lawrence  McGinnes,
claiming  personal  injuries,  property,  and  punitive  damages of $20 billion,
arising from alleged releases of hazardous and toxic substances to air, soil and
water at the McGinnes  waste  disposal  site located in Galveston  County.  This
matter was  consolidated  with two other  related  cases in December  1993.  The
complaint sets forth numerous causes of action,  including fraud, negligence and
strict liability, including, among other things, allegations that the defendants
sent  hazardous,  toxic and noxious  chemicals  and other waste  products to the
McGinnes site for disposal. In March 1995, the Company entered into a settlement
agreement  with  certain  plaintiffs,  pursuant to which the Company  paid seven
thousand  dollars in return for  withdrawal of their claims against the Company.
On August 8, 1997, the Company  settled all claims with respect to the remaining
plaintiffs for  approximately  twelve  thousand  dollars plus legal costs.  This
matter is now concluded.
    

On December 17, 1996, AES was named  defendant in a complaint filed in the Court
of Chancery in Delaware. The suit was brought by the holder of 750 shares of AES
Chigen Class A Common Stock  individually  and on behalf of a purported class of
public  shareholders  of AES Chigen in response to an amalgamation to be entered
into between AES Chigen and AES. The complaint alleges, among other things, that
AES breached its alleged  fiduciary  duty as a controlling  shareholder to treat
the class with fairness,  and questions the sufficiency of the  consideration to
be paid to AES Chigen shareholders.  The complaint sought damages and injunctive
relief.  AES Chigen was not named in the suit. On March 13, 1997  settlement was
reached subject to court approval.

The Company is involved in certain other legal  proceedings in the normal course
of  business.  It is the  opinion  of  the  Company  that  none  of the  pending
litigation  is  expected  to have a material  adverse  effect on its  results of
operations or financial position.

7. STOCKHOLDERS' EQUITY
------------------------------------

                                                                        1996          1995          1994
                                                                     -------       -------        ------
In millions
Common stock
 Balance at January 1 and December 31   ...........................    $   1         $   1         $   1
                                                                      ======        ======        ======
Additional paid-in capital
 Balance at January 1 .............................................    $ 293         $ 240         $ 203
 Issuance of common stock under benefit plans and exercise of stock
   options and warrants  ..........................................        3             2             2
 Tax benefit associated with the exercise of options   ............       15            --            --
 Issuance of common stock on conversion of 6.5% subordinated
   debentures, net ($13.08 per share)..............................       49            --            --
 Common stock dividends (1994-3% per share)   .....................       --            --            47
 AES Chigen Class A redeemable common stock   .....................       --            51           (12)
                                                                      ------        ------        ------
Balance at December 31   ..........................................    $ 360         $ 293         $ 240
                                                                      ======        ======        ======
Retained earnings
 Balance at January 1 .............................................    $ 271         $ 164         $ 111
 Net income for the year ..........................................      125           107           100
 Common stock dividends (1994-3% per share)   .....................       --            --           (47)
                                                                      ------        ------        ------
Balance at December 31   ..........................................    $ 396         $ 271         $ 164
                                                                      ======        ======        ======
Cumulative foreign currency translation adjustment
 Balance at December 31  ..........................................    $ (33)        $ (10)        $  (3)
                                                                      ======        ======        ======
Treasury stock
 Balance at December 31  ..........................................    $  (3)        $  (6)        $  --
                                                                      ======        ======        ======
STOCK SPLIT AND STOCK  DIVIDEND -- On December 7, 1993,  the Board of  Directors
authorized  a  three-for-two  split,  effected in the form of a stock  dividend,
payable to stockholders of record on January 15, 1994. Additionally, on February
17, 1994, the Company  declared a 3% stock dividend,  payable to stockholders of
record on March 10, 1994.  Accordingly,  all  outstanding  share,  per share and
stock  option data in all periods  presented  have been  restated to reflect the
split and the 3% stock dividend.
On July 30, 1996, the Company  exercised its right to redeem the Debentures at a
redemption  price equal to  approximately  104% of the  principal  amount of the
debentures,  together with accrued interest through the date of redemption. As a
result,  $49.7 million of the debentures  were converted into 3.8 million shares
of common stock of the Company at a conversion price of $13.08 per share.

SUBSEQUENT  EVENT -- On July 15,  1997,  the  Board of  Directors  authorized  a
two-for-one-split,  effected  in  the  form  of a  stock  dividend,  payable  to
stockholders of record on July 28, 1997. Accordingly, all outstanding share, per
share and stock  option  data in all  periods  presented  have been  restated to
reflect the split.

STOCK  OPTIONS AND  WARRANTS  -- The  Company has granted  options for shares of
common stock under its stock  option  plans.  Under the terms of the plans,  the
Company may issue options to purchase shares of the Company's  common stock at a
price equal to 100% of the market  price at the date the option is granted.  The
options become  eligible for exercise under various  schedules.  At December 31,
1996, there were approximately 4 million shares reserved for future grants under
the plans.  A summary of the option  activity  follows (in thousands of shares):
-----------------------------------------------------------------------

                                                                              DECEMBER 31,
                                                 -----------------------------------------------------------------------
                                                                   1996                     1995                    1994
                                                 ----------------------   ----------------------   ---------------------
                                                             WEIGHTED-                WEIGHTED-                WEIGHTED-
                                                              AVERAGE                  AVERAGE                 AVERAGE
                                                             EXERCISE                 EXERCISE                 EXERCISE
                                                   SHARES      PRICE       SHARES       PRICE       SHARES      PRICE
                                                 --------   -----------   --------   -----------   --------   ----------
Options outstanding--beginning of year  ......    8,126       $ 7.28       7,080       $ 6.04       5,998       $ 4.89
Exercised during the year   ..................     (960)        5.35        (710)        8.86        (374)        1.33
Forfeitures during the year ..................     (432)       10.28        (114)        9.18         (24)        6.59
Granted during the year  .....................    1,286        19.39       1,870        10.02       1,480         9.46
                                                  -----                    -----                    -----       
Outstanding--end of year .....................    8,020         9.30       8,126         7.28       7,080         6.04
                                                  =====                    =====                    =====       
Eligible for exercise--end of year   .........    4,264         6.43       2,418         4.52       2,118         3.01
                                                  =====                    =====                    =====
The following table summarizes  information  about stock options  outstanding at
December 31, 1996 (in thousands of shares):
--------------------------------------------------------------------------------------------

                                             OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                           ------------------------------------------------------- ------------------------------------
                                                REMAINING LIFE   WEIGHTED-AVERAGE                      WEIGHTED-AVERAGE
  RANGE OF EXERCISE PRICES  TOTAL OUTSTANDING     (IN YEARS)     EXERCISE PRICE    TOTAL EXERCISABLE     EXERCISE PRICE
-------------------------- ------------------- ---------------- ------------------ ------------------- ----------------
$.78 to $3.24 ............        2,026               3.3             $ 2.57              2,022             $ 2.57
$5.83 to $9.88............        2,522               6.9               8.77                984               8.72
$10.00 to $14.44 .........        2,496               8.3              10.49              1,186              10.40
$15.88 to $22.07 .........          976              10.0              21.57                 72              18.16
                                  ------                                                  ------
Total   ..................        8,020                                                   4,264
                                  ======                                                  ======
The Company  accounts for its stock-based  compensation  plans under APB No. 25,
and as a result, no compensation  expense has been recognized in connection with
the options,  as all options  have been  granted  only to AES people,  including
Directors,  with an exercise  price equal to the market  price of the  Company's
common  stock  on the date of  grant.  The  Company  adopted  SFAS  No.  123 for
disclosure  purposes in 1996. For SFAS No. 123 purposes,  the fair value of each
option grant has been estimated as of the date of grant using the  Black-Scholes
option pricing model with the following weighted average assumptions:  risk-free
interest rate of 6.5%,  5.5%, and 7.5% and expected  volatility of 28%, 24%, and
22% for the years ended 1996,  1995 and 1994,  respectively,  a dividend  payout
rate of zero for each year and an expected  option life of 7 years.  Using these
assumptions,  the weighted  average fair value of the stock  options  granted is
$8.81 and $4.09 for 1996 and 1995, respectively.  There were no adjustments made
in  calculating  the  fair  value  to  account  for  vesting  provisions  or for
non-transferability or risk of forfeiture.
Had compensation expense been determined consistent with SFAS No. 123, utilizing
the assumptions  detailed above, the Company's net income and earnings per share
for the year ended  December 31, 1996,  1995 and 1994 would have been reduced to
the following pro forma amounts (in millions):

                               -----------------------------

                                    FOR THE YEARS ENDED
                                       DECEMBER 31,
                               -----------------------------
                                  1996       1995       1994
                               --------   --------   -------
Net Income:
 As Reported ...............    $  125     $  107     $  100
 Pro forma   ...............       121        106        100
Net income per common share:
 As Reported ...............    $ 0.81     $ 0.71     $ 0.66
 Pro forma   ...............      0.79       0.70       0.66

The use of such  amounts  and  assumptions  are not  intended  to  forecast  any
possible future  appreciation of the Company's stock price or change in dividend
policy.

In addition to the options described above, the Company has outstanding warrants
to  purchase up to 1.4  million  shares of its common  stock at $14.72 per share
through  July 2000,  which were issued as partial  settlement  of a  shareholder
class  action suit and were  expensed  in 1995.  Warrants  exercised  under this
settlement were not significant at December 31, 1996.

AES CHINA  GENERATING CO. LTD. -- During 1994,  AES Chigen  completed an initial
public offering for the sale of 10.2 million shares of Class A redeemable common
stock. Prior to the offering,  AES contributed $50 million to AES Chigen for 7.5
million  shares of Class B common  stock.  AES,  as the sole Class B holder,  is
entitled  to elect  one-half  of the board of  directors  of AES  Chigen.  As of
December 22, 1995, AES Chigen had entered into binding  commitments to invest in
excess of $50 million in power  projects in the  People's  Republic of China and
the  previously  held right of Class A  Shareholders  to  require  AES Chigen to
repurchase their shares has expired.  As a result, the Company has allocated the
net  proceeds  from the  issuance  of the Class A shares to  additional  paid-in
capital and minority interest during 1995. In November 1996, the Company and AES
Chigen   signed  a  definitive   agreement   for  the  Company  to  acquire  the
approximately  8.2  million  outstanding  Class  A  shares  of AES  Chigen.  The
acquisition  will be accomplished by amalgamating AES Chigen with a wholly owned
subsidiary  of the  Company.  Subject to  approval of the holders of the Class A
common stock, AES Chigen  shareholders will receive shares of the Company common
stock at an exchange rate of 0.29 shares of the Company's  common stock for each
share of AES Chigen common stock.

8. INCOME TAXES

INCOME  TAX  PROVISION  --  The  provision  for  income  taxes  attributable  to
continuing operations consists of the following (in millions):

                    --------------------------

                       FOR THE YEARS ENDED
                           DECEMBER 31,
                    --------------------------
                      1996      1995      1994
                    -------   -------   ------
Federal
 Current   ......   $ 19        $ 4       $ 2
 Deferred  ......     27         47        35
State
 Current   ......     12          5         4
 Deferred  ......     (2)         1         3
Foreign
 Current   ......      3         --        --
 Deferred  ......      1         --        --
                    -----       ----     ----
Total   .........   $ 60        $57       $44
                    =====       ====     ====
EFFECTIVE AND STATUTORY  RATE  RECONCILIATION  -- A  reconciliation  of the U.S.
statutory  federal  income  tax rate to the  Company's  effective  tax rate as a
percentage of income before taxes (excluding  earnings and taxes from affiliates
accounted for on the equity method, and minority interests) is as follows:

                                                 -------------------------------

                                                       FOR THE YEARS ENDED
                                                            DECEMBER 31,
                                                 -------------------------------
                                                   1996        1995      1994
                                                 ---------   -------   ---------
Statutory federal tax rate   ..................     35%        35%        35%
Change in valuation allowance   ...............     (2)        (6)        (2)
State taxes, net of federal tax benefit  ......      6          6          5
Foreign taxes .................................      2         --         --
Other--net ....................................     (1)         3         (4)
                                                   ----       ----       ----
Effective tax rate  ...........................     40%        38%        34%
                                                   ====       ====       ====

DEFERRED INCOME TAXES -- Deferred income taxes relate principally to accelerated
depreciation  methods used for tax purposes and certain other expenses which are
deducted for income tax  purposes,  but not for  financial  reporting  purposes.
Deferred  income taxes reflect the net tax effects of (a) temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes,  and (b)  operating  loss
and tax credit  carryforwards.  These  items are stated at the enacted tax rates
that are  expected to be in effect when taxes are  actually  paid or  recovered.
Deferred tax assets and deferred tax liabilities are as follows (in millions):
---------------------------------

                                                                      FOR THE YEARS ENDED
                                                                          DECEMBER 31,
                                                               ---------------------------------
                                                                  1996       1995         1994
                                                               ---------   ---------   ---------
Differences between book and tax basis of property and total
 deferred tax liability ....................................    $  379     $  379       $  219
Operating loss carryforwards  ..............................      (124)      (167)        (231)
Tax credit carryforwards   .................................       (97)       (71)         (68)
Other deductible temporary differences .....................       (13)        (1)         (15)
                                                                ------     -------      ------
Total gross deferred tax asset   ...........................      (234)      (239)        (314)
Less: valuation allowance  .................................        33          9          168
                                                                ------     -------      ------
Total net deferred tax asset  ..............................      (201)      (230)        (146)
                                                                ------     -------      ------
Net deferred tax liability .................................    $  178     $  149       $   73
                                                                ======     =======      ======
As  of  December  31,  1996,   the  Company  had  federal  net  operating   loss
carryforwards for tax purposes of approximately  $295 million expiring from 2001
through 2010,  federal  investment tax credit  carryforwards for tax purposes of
approximately  $54 million  expiring  in years 2001  through  2006,  foreign tax
credit  carryforwards  of $3 million  expiring in 2001 and  federal  alternative
minimum tax credits of  approximately  $30 million  which  carryforward  without
expiration.

The valuation  allowance  increased during the current year by approximately $24
million to $33 million at December 31, 1996.  This increase  resulted  primarily
from the acquisition of foreign entities with certain pre-existing  deferred tax
assets, the ultimate  realization of which cannot be determined on a more likely
than not basis.  The  valuation  allowance for these  pre-existing  deferred tax
assets was recorded as acquisition  adjustments and had no effect on the current
year income tax  expense.  The $33 million  valuation  allowance at December 31,
1996 relates primarily to state and foreign tax credits, state operating losses,
and deferred tax assets,  the ultimate  realization  of which is uncertain.  The
Company believes that it is more likely than not that the remaining deferred tax
assets will be realized.
The valuation  allowance  decreased during 1995 by approximately $159 million to
$9 million.  The primary reason for this decrease was the Company's  purchase of
the outstanding  debt of AES Deepwater on January 20, 1995, which had the effect
of  reducing  certain  of the  Company's  deferred  tax  assets.  The $9 million
valuation  allowance at December 31, 1995 related primarily to state tax credits
and foreign  operating losses,  the ultimate  realization of which is uncertain.
The Company believes that it is more likely than not that the remaining deferred
tax assets will be realized.

Undistributed  earnings of certain foreign affiliates  aggregated $85 million on
December 31,  1996.  The Company  considers  these  earnings to be  indefinitely
reinvested  outside of the U.S. and,  accordingly,  no U.S.  deferred taxes have
been recorded  with respect to the earnings.  Should the earnings be remitted as
dividends, the Company may be subject to additional U.S. taxes, net of allowable
foreign  tax  credits.  It is not  practicable  to  estimate  the  amount of any
additional taxes which may be payable on the undistributed earnings.

9. PROFIT SHARING AND DEFERRED COMPENSATION PLANS

PROFIT SHARING AND STOCK  OWNERSHIP PLAN -- The Company has a profit sharing and
stock ownership plan,  qualified under section 401 of the Internal Revenue Code,
which is  available  to all AES people.  The profit  sharing  plan  provides for
Company matching contributions, other Company contributions at the discretion of
the  Compensation  Committee of the Board of Directors,  and  discretionary  tax
deferred  contributions from the participants.  Participants are fully vested in
their own contributions and the Company's matching  contributions.  Participants
vest  in  other  Company   contributions   over  a  five-year  period.   Company
contributions to the plan were $4 million for each of the years ended 1996, 1995
and 1994.

DEFERRED  COMPENSATION  PLANS -- The  Company has a deferred  compensation  plan
under which directors of the Company may elect to have a portion or all of their
compensation  deferred.  The amounts  allocated to each  participant's  deferred
compensation  account may be converted into common stock units. Upon termination
or death of a participant,  the Company is required to distribute, under various
methods,  cash or the number of shares of common  stock  accumulated  within the
participant's deferred compensation account. Distribution of stock is to be made
from common stock held in treasury or from  authorized but  previously  unissued
shares.  The plan terminates and full distribution is required to be made to all
participants upon any changes of control of the Company (as defined therein).

In addition,  the Company has an executive officers' deferred compensation plan.
At the election of an executive officer, the Company will establish an unfunded,
non-qualified compensation arrangement for each officer who chooses to terminate
participation in the Company's profit sharing and employee stock ownership plan.
The  participant  may  elect to  forego  payment  of any  portion  of his or her
compensation  and have an equal amount allocated to a contribution  account.  In
addition, the Company will credit the participant's account with an amount equal
to the Company's  contributions  (both  matching and profit  sharing) that would
have been made on such  officer's  behalf if he or she had been a participant in
the profit sharing plan. The  participant  may elect to have all or a portion of
the Company's  contribution converted into stock units. Dividends paid on common
stock are allocated to the participant's account in the form of stock units. The
participant's  account balances are distributable upon termination of employment
or death.

During 1995, the Company adopted a supplemental retirement plan covering certain
AES  people.   The  plan  provides   incremental  profit  sharing  and  matching
contributions to participants that would have been paid to their accounts in the
Company's  profit sharing plan if it were not for limitations  imposed by income
tax regulations. All contributions to the plan are vested in the manner provided
in the Company's  profit sharing plan, and once vested are  nonforfeitable.  The
participant's  account balances are distributable upon termination of employment
or death.

The Company is not obligated under any post-retirement  benefit plans other than
the profit sharing and deferred compensation plans described in this Note.
10. QUARTERLY DATA (UNAUDITED)

The following table summarizes the unaudited quarterly  statements of operations
(in millions, except per share amounts):

                               ---------------------------------------

                                         QUARTERS ENDED 1996
                               ---------------------------------------
                                MAR 31     JUN 30     SEP 30    DEC 31
                               -------    -------    -------   -------
Sales and services .........     $ 172      $ 174      $ 205     $ 284
Gross margin ...............        74         76         85        98
Net income   ...............        29         28         32        36
Net income per share  ......     $0.19      $0.19      $0.21     $0.23

                               ---------------------------------------

                                         QUARTERS ENDED 1995
                               ---------------------------------------
                                MAR 31     JUN 30     SEP 30    DEC 31
                               -------    -------    -------   -------
Sales and services .........     $ 169      $ 166      $ 173     $ 171
Gross margin ...............        69         69         73        74
Net income   ...............        25         27         27        28
Net income per share  ......     $0.17      $0.18      $0.18     $0.19

11. GEOGRAPHIC SEGMENTS

Information about the Company's  operations in different  geographic areas is as
follows (in millions):

                              ------------------------------

                               FOR THE YEARS ENDED
                                    DECEMBER 31,
                              ------------------------------
                                1996       1995         1994
                              ------     ------        -----
REVENUES
North America  .............    $554       $542         $523
South America  .............     146        131            2
Asia  ......................      45          1           --
Europe   ...................      90          5            8
                               -----      -----        -----
Total ......................    $835       $679         $533
                               =====      =====        =====

                            --------------------------------

                                 FOR THE YEARS ENDED
                                     DECEMBER 31,
                            --------------------------------
                               1996         1995        1994
                            -------      -------      ------
OPERATING INCOME
North America  ............    $258         $251       $ 245
South America  ............      21           14          --
Asia  .....................      (9)          (8)        (11)
Europe   ..................       8           (4)          2
                              -----        -----       -----
Total .....................    $278         $253       $ 236
                              =====        =====       =====
-----------------------------

                             FOR THE YEARS ENDED
                                 DECEMBER 31,
                        -----------------------------
                            1996       1995      1994
                        --------   --------   -------
IDENTIFIABLE ASSETS
North America  ......     $1,831     $1,693    $1,569
South America  ......        683        230        46
Asia  ...............        744        328       221
Europe   ............        364         90        79
                         -------    -------   -------
Total ...............     $3,622     $2,341    $1,915
                         =======    =======   =======

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated  fair values of the  Company's  assets and  liabilities  have been
determined using available market information. The estimates are not necessarily
indicative  of the  amounts  the  Company  could  realize  in a  current  market
exchange.   The  use  of  different   market   assumptions   and/or   estimation
methodologies may have a material effect on the estimated fair value amounts.

The fair value of current financial assets,  current  liabilities,  debt service
reserves and other  deposits,  and other assets are assumed to be equal to their
reported carrying amounts. The fair value of project financing debt is estimated
differently based upon the type of loan. For variable rate loans, carrying value
approximates fair value. For fixed rate loans, the fair value is estimated using
discounted  cash  flow  analyses  based  on the  Company's  current  incremental
borrowing  rates at which  similar  borrowing  arrangements  would be made under
current conditions, or by the estimated discount rate a prospective seller would
pay to a credit-worthy third party to assume the obligations. The carrying value
and fair value of the AES  Placerita  capital lease have been excluded from this
disclosure.  The fair value of swap  agreements is the estimated net amount that
the Company would pay to terminate the agreements at the balance sheet date. The
estimated  fair  values of the  Debentures,  9 3/4%  Notes and 10 1/4% Notes are
based on the quoted market prices at December 31, 1996 and 1995.

The estimated fair values of the Company's financial instruments at December 31,
1996 and 1995 are as follows (in millions):

                           --------------------------------------------------

                                               1996                      1995
                           ------------------------   -----------------------
                            CARRYING                   CARRYING
                              AMOUNT     FAIR VALUE      AMOUNT   FAIR VALUE
                           ---------   ------------   ---------   -----------
Project financing debt  ... $1,562        $1,562        $1,071      $1,078
Other notes payable  ......    538           560           175         180
Interest rate swaps  ......     --            68            --         137

The fair value  estimates  presented  herein are based on pertinent  information
available  as of  December  31,  1996 and 1995.  The Company is not aware of any
factors that would  significantly  affect the estimated fair value amounts since
that date.

13. SUBSEQUENT EVENTS

On June 30, 1997, AES acquired the international  assets of Destec Energy,  Inc.
("Destec") for approximately  $430 million.  The purchase includes five electric
generating  plants and a number of power  projects  in  development.  The plants
acquired by AES (with  ownership  percentages in  parenthesis)  include a 110 MW
gas-fired  combined  cycle plant in Kingston,  Canada (50%);  a 405 MW gas-fired
combined cycle plant in Terneuzen,  Netherlands (50%); a 140 MW gas-fired simple
cycle plant in Cornwall,  England (100%);  a 235 MW oil-fired simple cycle plant
in Santo Domingo,  Dominican  Republic (99%);  and a 1600 MW coal-fired plant in
Victoria, Australia (20%).

In May 1997, the Company and its partner,  CEA acquired an aggregate of 90% (AES
acquired 60% and CEA acquired 30%) of two  integrated  electricity  companies of
ESEBA serving certain portions of the province of Buenos Aires, Argentina for an
aggregate purchase price of $565 million. The remaining 10% will be owned by the
employees of each of the two acquired companies.
On May 8, 1997,  AES completed its  amalgamation  with AES China  Generating Co.
Ltd.  (see  Note  7).  As  a  result  of  the   amalgation  the  Company  issued
approximately  5.0 million shares of AES Common Stock in exchange for all of the
outstanding AES Chigen Class A Common Stock.

In May 1997,  AES through a consortium  agreed to acquire  approximately  13% of
CEMIG, an integrated  electric  utility service in the State of Minas Gerais for
approximately  $1 billion.  These shares also represent a 33% voting interest in
CEMIG.

On October 27,  1997,  AES  acquired  certain  distribution  assets of CEEE,  an
integrated  electric  utility  service  in the state of Rio do Sol  Brazil,  for
approximately $1.37 billion.
EXHIBIT INDEX

Exhibit
No.

(b) Exhibits:

23.1 Consent of Deloitte & Touche LLP.