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                UNITED STATES 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) March 18, 1999

                               THE AES CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)

       DELAWARE                       0-19281                    54-1163725     
(State of incorporation       (Commission File Number)         (IRS Employer    
    or organization)                                         Identification No.)


                             1001 NORTH 19TH STREET
                               ARLINGTON, VA 22209
    (Address, including zip code of Registrant's principal Executive Offices)

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

                                 NOT APPLICABLE
          (Former Name or Former Address, if changed since last report)


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ITEM 5. OTHER EVENTS

      This Current  Report on Form 8-K includes the  Discussion  and Analysis of
Financial  Condition and Results of  Operations  filed under Item 5 and the 1998
consolidated financial statements of The AES Corporation filed under Item 7.


<PAGE>

    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION  

     The  AES  Corporation  (AES  or the  Company)  is a  global  power  company
committed to serving the world's needs for electricity in a socially responsible
way.  Electricity  sales accounted for 97% of total revenues during 1998 and 94%
during  1997.  Other  sales  arise from the sale of steam and other  commodities
related to the Company's  cogeneration  operations.  Service revenues  represent
fees earned in  connection  with  wholesale  power  services,  and operating and
construction services provided by AES to its affiliates.

     The majority of the Company's  revenues  represent  sales of electricity to
customers  (generally  electric  utilities or regional  electric  companies) for
further resale to end users. This is referred to as the electricity "generation"
business.  AES's generation business  represented 58% of total revenues for 1998
compared to 74% for 1997. Sales by these  generation  companies are usually made
under long-term contracts from power plants owned by the Company's  subsidiaries
and affiliates,  although in certain instances,  the Company sells directly into
regional wholesale electricity markets without a contract.  The Company owns new
plants constructed for such purposes  ("greenfield"  plants) as well as existing
power plants acquired through  competitively  bid  privatization  initiatives or
negotiated acquisitions.

     In its generation business, AES now operates and owns (entirely or in part)
a diverse  portfolio  of  electric  power  plants  (including  those  within the
integrated  distribution  companies  discussed  below) with a total  capacity of
24,076  megawatts (MW). Of that total, 29% are fueled by coal or petroleum coke,
24% are fueled by natural gas, 33% are hydroelectric  facilities,  6% are fueled
by oil, and the remaining 8% are capable of using multiple  fossil fuels. Of the
total MW,  5,025  (nine  plants) are  located in the United  States,  817 (eight
plants) are in China,  1,281  (three  plants) are in Hungary,  6,456  (forty-one
plants) are in Brazil,  1,818 (five  plants) are in the UK, 885 (six plants) are
in  Argentina,  5,384  (seven  plants)  are in  Kazakhstan  (including  4,000 MW
attributable  to  Ekibastuz   which   currently  has  a  reliable   capacity  of
approximately  25%),  210 (one plant) are in the  Dominican  Republic,  110 (one
plant) are in Canada,  695 (two plants) are in Pakistan,  405 (one plant) are in
the Netherlands,  288 (one plant) are in Australia, 420 (one plant) are in India
(operational  control in 1999) and 282 (three plants) are in Panama (acquired in
1999).

     AES is also  currently in the process of adding  approximately  5,254 MW to
its operating portfolio by constructing  several new plants. These include a 180
MW coal-fired plant and a 700 MW natural gas-fired plant in the United States, a
600 MW natural  gas-fired plant in Brazil, a 2,100 MW coal-fired plant in China,
an 830 MW natural  gas-fired  plant in Argentina,  a 360 MW coal-fired  plant in
England and a 484 MW natural gas-fired plant in Mexico.

     As a result,  AES's total MW of the 96 power  plants in  operation or under
construction  is  approximately  29,330 MW and net  equity  ownership  (total MW
adjusted for the Company's ownership percentage) represents approximately 19,819
MW.

     Because  of the  significant  complexities  associated  with  building  new
electric  generating plants,  construction  periods often range from two to five
years,  depending on the  technology  and location.  AES currently  expects that
projects now under  construction  will reach  commercial  operation and begin to
sell  electricity at various dates through the year 2002. The completion of each
plant in a timely manner is generally  supported by a guarantee from the plant's
construction contractor,  although in certain cases, AES has assumed the risk of
satisfactory  construction  completion.  However,  it remains  possible,  due to
changes in the  economic,  political,  technological,  regulatory  or logistical
circumstances involving each individual plant, that commercial operations may be
delayed in certain cases.

     AES also  sells  electricity  directly  to end  users  such as  commercial,
industrial,  governmental and residential customers.  This is referred to as the
electricity "distribution" business. AES's distribution business represented 39%
of total revenues for 1998 compared to 20% for 1997.  Electricity sales by AES's
distribution  businesses  are  generally  made  pursuant  to the  provisions  of
long-term  electricity sale concessions granted by the appropriate  governmental
authority as part of the original privatization of


<PAGE>


each distribution  company.  In certain cases, these distribution  companies are
"integrated",  in that they also own  electric  power  plants for the purpose of
generating a portion of the  electricity  they sell. Each  distribution  company
also purchases,  in varying proportions,  electricity from third party wholesale
suppliers, including in certain cases, other subsidiaries of the Company.

     AES has majority  ownership in three  distribution  companies in Argentina,
one in  Brazil  and one in El  Salvador,  a heat  and  electricity  distribution
business in Kazakhstan,  one in the Republic of Georgia  (operational control in
1999),  and  less  than  majority  ownership  in three  additional  distribution
companies in Brazil.  These ten companies  serve a total of  approximately  13.2
million  customers with sales  exceeding  63,000 gigawatt hours. On a net equity
basis,  AES's ownership  represents  approximately 3 million customers and sales
exceeding 22,000 gigawatt hours.

     AES  continues  to  believe  that  there  is  significant  demand  for more
efficiently operated electricity  generation and distribution  businesses.  As a
result, and guided by its commitment to serve the world's needs for electricity,
AES is pursuing additional  greenfield  development projects and acquisitions in
many countries.  Several of these, if consummated,  would require the Company to
obtain  substantial  additional  financing,   including  both  debt  and  equity
financing.

     AES is also  currently in the process of completing  several  acquisitions,
including its agreement to acquire six  coal-fired  generating  plants  totaling
approximately 1,400 MW from NGE Generation, Inc., an affiliate of New York State
Electric  and Gas  Corporation,  and its  agreement  to acquire the  outstanding
shares of Cilcorp, Inc. an integrated distribution company in Illinois.

     Certain  subsidiaries and affiliates of the Company (domestic and non-U.S.)
have signed  long-term  contracts or made similar  arrangements  for the sale of
electricity and are in various stages of developing the related greenfield power
plants. There exist substantial risks to their successful completion, including,
but  not  limited  to,  those   relating  to  failures  of  siting,   financing,
construction,  permitting,  governmental  approvals or  termination of the power
sales  contract  as a result  of a failure  to meet  certain  milestones.  As of
December 31, 1998, capitalized costs for projects under development and in early
stage construction were  approximately  $144 million.  The Company believes that
these costs are recoverable;  however, no assurance can be given that changes in
circumstances related to individual projects will not occur or that any of these
projects will be completed and reach commercial operation.

     AES has been  successful  in growing its  business  and serving  additional
customers  by   participating   in  competitive   bidding  under   privatization
initiatives  and other  asset  sales  and has been  particularly  interested  in
acquiring  existing  businesses  or  assets  in  electricity  markets  that  are
promoting  competition  and  eliminating  rate  of  return  regulation.  In such
privatizations,  sellers generally seek to complete competitive solicitations in
less  than  one  year,  much  quicker  than  the time  periods  associated  with
greenfield  development  and  construction,  and  require  payment  in  full  on
transfer.  AES  believes  that its  experience  in  competitive  markets and its
worldwide  integrated group structure (with its significant  geographic coverage
and presence) enable it to react quickly and creatively in such situations.

     Because of this relatively  quick process or other  considerations,  it may
not  always  be  possible  to  arrange   "project   financing"   (the  Company's
historically  preferred  financing  method,  which is  discussed  further  under
"Capital   Resources,   Liquidity  and  Market  Risk")  for  specific  potential
acquisitions.  Additionally,  as  in  the  past,  certain  acquisitions  or  the
commencement   of  construction  on  several   greenfield   developments   would
potentially  require  the  Company to obtain  substantial  additional  financing
including  both  debt and  equity.  As a  result,  and in order to  enhance  its
financial capabilities to respond to these more accelerated  opportunities,  the
Company  maintains a $600 million  revolving line and letter of credit  facility
(the Revolver).  AES also maintains a "universal shelf"  registration  statement
with the SEC which allows for the public issuance of various additional debt and
preferred or common equity  securities,  either  individually or in combination,
and which currently  represents  approximately  $900 million in unused potential
proceeds from the issuance of public securities.

<PAGE>
RESULTS OF OPERATIONS

REVENUES.  Total  revenues  increased  $987 million (70%) to $2,398 million from
1997 to 1998 after  increasing $576 million (69%) to $1,411 million from 1996 to
1997.  The increase in 1998  primarily  reflects the  acquisition of controlling
interests in two distribution  companies,  Clesa and Edelap,  three  electricity
generating  plants at Southland,  a full year of operations at Eden,  Edes, Sul,
Los Mina,  Altai and Lal Pir, and the  commencement of commercial  operations at
Pak  Gen,  Barry,  Hefei,  and  Jiaozou,  offset  in part by lower  revenues  at
Ekibastuz.   The  increase  in  1997  primarily   reflects  the  acquisition  of
controlling  interests in the  distribution  companies  Eden,  Edes, and Sul and
electricity  generating  plants at Altai and Los Mina, a full year of operations
at Tisza and Ekibastuz,  service revenue  associated with construction at Elsta,
and the start of commercial operations at Lal Pir.

     The nature of most of the Company's generating businesses is such that each
power plant generally  relies on one power sales contract with a single electric
customer for the majority, if not all, of its revenues. The prolonged failure of
any significant  customer to fulfill its contractual  payment obligations in the
future could have a substantial  negative impact on AES's results of operations.
The Company has sought to reduce this risk,  where  possible,  by entering  into
power sales contracts with customers who have their debt or preferred securities
rated "investment grade", or by obtaining sovereign government guarantees of the
purchaser's  obligations,  as  well  as by  locating  its  plants  in  different
geographic  areas  in  order  to  mitigate  the  effects  of  regional  economic
downturns.

     However,  AES does not limit  its  business  solely  to the most  developed
countries  or  economies,  nor only to those  countries  with  investment  grade
sovereign  credit  ratings.  In  certain  locations,   particularly   developing
countries or countries that are in a transition from centrally planned to market
oriented economies,  the electricity purchasers,  both wholesale and retail, may
experience  difficulty  in  meeting  contractual  payment  obligations.  AES has
recorded  a  provision  for  uncollectible  amounts  of  $22  million  for  1998
associated  with  receivables  arising  from  the  Company's  operations  in the
Dominican Republic and Kazakhstan,  and $17 million and $20 million for 1997 and
1996,  respectively,  associated  with  receivables  arising from the  Company's
operations   in   Kazakhstan.   There  can  be  no  assurance  of  the  ultimate
collectibility of these amounts owed to the Company.

     A portion,  and in certain cases all, of the electricity sales from several
plants is not subject to a contract and is available for sale, when economically
advantageous,  in the  relevant  spot  electricity  market.  The prices paid for
electricity  in the  spot  markets  may be  volatile  and are  dependent  on the
behavior of the local  economy,  including  the demand for, and retail price of,
electricity  and the  competitive  price and  availability  of power  from other
suppliers.

     Electricity  sales by AES's  distribution  businesses  are made pursuant to
provisions  of long-term  electricity  sales  concession  agreements  ranging in
remaining length from 18 to 93 years.  Each business is generally  authorized to
charge its  customers  a tariff for  electric  services  which  consists  of two
components:  an energy  expense  pass-through  component  and an operating  cost
component.  Both components are established as part of the original grant of the
concession  for  certain  initial  periods  (ranging  from  four to eight  years
remaining).  Beginning  subsequent  to  the  initial  periods,  and  at  regular
intervals  thereafter,  the  concession  grantor has the authority to review the
costs of the relevant  business to determine the inflation  adjustment (or other
similar  adjustment  factor),  if any,  to the  operating  cost  component  (the
"Adjustment  Escalator") for the subsequent  regular  interval.  This review can
result in an Adjustment  Escalator that has a positive,  zero or negative value.
To date,  the Company has not reached the end of the initial  tariff  periods in
any of its distribution businesses. As a result, there can be no assurance as to
the effects, if any, on its future results of operations of potential changes to
the Adjustment Escalator.

     As stated above, the electricity  sales  concessions  provide for an annual
adjustment  to the tariff,  resulting in  adjustments  based on several  factors
including  inflation  increases as measured by different agreed upon indices. In
certain  situations,  there is also an 



<PAGE>

explicit  adjustment  to a portion of the tariff that reflects  changes,  either
entirely or in part, in exchange  rates between the local  currency and the U.S.
Dollar.  Such adjustments are made in arrears at various regular intervals,  and
in certain cases, requests for interim adjustments are permitted.

     However,  if the relevant  foreign  currency were to experience a sudden or
severe  devaluation  relative  to  the  U.S.  Dollar  (the  Company's  reporting
currency),  such as occurred to the Brazilian  Real in January 1999,  because of
the in arrears nature of the  respective  adjustment in the tariff or because of
the potential  delays or magnitude of the resulting local currency  inflation of
the tariff, the future results of operations of AES's distribution  companies in
that country could be adversely affected.  Depending on the duration or severity
of such  devaluation,  the  future  results  of  operations  of AES may  also be
adversely affected.

     In Brazil,  AES has interests in four distribution  companies or integrated
utilities  (the  Brazilian   Businesses).   These  distribution  companies  have
long-term   concession   agreements  which,   although  varying  in  term,  have
substantially  similar clauses providing for tariff adjustments based on certain
specific events or circumstances. These adjustments occur annually (at different
times) for each  Brazilian  Business and, in certain  instances,  in response to
specific  requests for  adjustment.  Adjustments  to the tariff rates during the
annual  proceedings are designed to reflect,  among others, (i) increases in the
inflation rate as represented by a Brazilian  inflation  index (IGPM),  and (ii)
increases in specified  operating costs  (including  purchased power costs),  in
each case as measured  over the preceding  twelve  months.  The specific  tariff
adjustment  mechanism  provides  each  Brazilian  Business the option to request
additional  rate  adjustments  arising from unusual or significant  events which
disrupt the economic and financial equilibrium of such business. Such events may
include  significant  increases in purchased power costs or local inflation,  or
significant currency  devaluation.  The Brazilian Business requesting relief has
the  burden  to prove the  impact  on its  financial  or  economic  equilibrium,
however, there can be no assurance that such adjustments will be granted.

     During early 1999, the Brazilian Real experienced a significant devaluation
relative to the U.S.  Dollar,  declining from 1.21 Brazilian Reais to the Dollar
at  December  31,  1998 to 1.79 Reais to the Dollar at  February  3, 1999.  As a
result, there will likely be a negative and potentially material impact on AES's
results of operations because of the effect of this and any further  devaluation
on the operating results of the Brazilian  Businesses.  Each Brazilian  Business
has or intends to recover the  specific  rate  adjustments  as  discussed in the
preceding  paragraphs;  however, the resulting effects of the devaluation on the
local Brazilian  inflation rate and the certainty,  timing, and amounts of these
rate  increases at each  business,  and  therefore,  the future  impact on AES's
earnings cannot be predicted. See also "Capital Resources,  Liquidity and Market
Risks" for additional  effects  associated with the devaluation of the Brazilian
Real. 

COSTS OF SALES AND SERVICES.  Total costs of sales and services  increased  $606
million (62%) to $1,587 million in 1998 after  increasing  $479 million (95%) to
$981 million in 1997. The increase in 1998 was primarily  caused by the costs of
electricity  sales  associated with the acquisition of controlling  interests in
two  distribution  companies,  Clesa and Edelap,  three  electricity  generating
plants at Southland,  a full year of operations  at Eden,  Edes,  Sul, Los Mina,
Altai and Lal Pir, and the start of  commercial  operations  at Pak Gen,  Barry,
Hefei,  and Jiaozou.  The increase in 1997 was caused  primarily by the costs of
electricity  sales  associated with the acquisition of controlling  interests in
Eden,  Edes,  Sul, Los Mina and Altai,  a full year of  operations  at Tisza and
Ekibastuz,  construction costs at Elsta, and the start of commercial  operations
at Lal Pir,  offset in part,  by lower  costs at San  Nicolas  due to lower fuel
prices.



<PAGE>

GROSS MARGIN. Gross margin (revenues less costs of sales and services) increased
$381  million  (89%) to $811  million  from 1997 to 1998  after  increasing  $97
million  (29%) to $430  million  from  1996 to  1997.  The  improvement  in 1998
primarily  reflects the  additional  gross margin  contributed by the operations
from the acquisitions of Clesa, Edelap, and Southland, as well as a full year of
oper ations at Altai,  Los Mina,  Eden, Edes, Sul, and Lal Pir, the commencement
of commercial  operations at Pak Gen, Barry,  Hefei,  and Jiaozou in addition to
improved  performance at Tisza,  offset  slightly by lower margins at Ekibastuz.
The  improvement  in  1997  primarily   reflects  the  additional  gross  margin
contributed by the operations of Eden, Edes, Sul, Los Mina, Altai, Tisza and Lal
Pir,  and  improved  operations  at San Nicolas and  Thames.  Gross  margin as a
percentage  of  total  revenues  (net  of  the  provision  to  reduce   contract
receivables)  increased from 29% in 1997 to 33% in 1998, primarily due to higher
relative gross margin  percentages of newly operating or acquired  businesses at
Lal Pir, Pak Gen,  Southland,  and Barry,  improved gross margin  percentages at
Tisza, Eden, Edes and Sul, offset in part, by a lower gross margin percentage at
Ekibastuz.  Gross margin as a percentage of total revenues (net of the provision
to  reduce  contract  receivable)  decreased  from  37% in  1996  to 29% in 1997
primarily due to lower relative gross margin percentages of businesses  acquired
in 1996 and 1997  including  Tisza,  Ekibastuz,  Eden,  Edes,  Los Mina, Sul and
Altai, offset in part, by an improved gross margin percentage at San Nicolas.

     The  Company's  operations  are located in several  different  geographical
areas.  Seasonal  variations or unusual weather  conditions in certain  regions,
including  in  particular,  Argentina  and  Brazil,  or the  specific  needs  of
individual power plants to perform routine or unanticipated maintenance that may
require an outage,  could  significantly  affect comparable  quarterly financial
results. In addition, some power sales contracts permit the customer to dispatch
the  related  plant  (i.e.,  direct  the plant to  deliver  a reduced  amount of
electrical  output)  within  certain  specified  parameters.  Such  dispatching,
however,  does not have a material  impact on the results of  operations  of the
related subsidiary because, even when dispatched,  the plant's capacity payments
generally are not reduced.

SELLING,   GENERAL   AND   ADMINISTRATIVE   EXPENSES.   Selling,   general   and
administrative  expenses increased $11 million (24%) to $56 million from 1997 to
1998 after  increasing  $10 million (29%) to $45 million from 1996 to 1997.  The
1998 increase is attributable to expenses associated with the development of new
business  opportunities.  The 1997 increase is  attributable  to  administrative
costs.  As a percentage of total revenue,  selling,  general and  administrative
expenses decreased to 2% in 1998, down from 3% in 1997 and down from 4% in 1996.
The Company's  general and  administrative  costs do not  necessarily  vary with
changes in revenue.

OPERATING  INCOME.  Operating income improved $365 million (99%) to $733 million
from 1997 to 1998 after  increasing  $90 million (32%) to $368 million from 1996
to 1997. The increases are the result of the factors  discussed in the preceding
paragraphs.

OTHER INCOME/(EXPENSE). Other income and expense, on a net basis, increased $103
million  (123%) to $187 million from 1997 to 1998 after  increasing  $13 million
(18%) to $84 million from 1996 to 1997.  Interest expense  increased 99% in 1998
and increased 69% in 1997. The increase in 1998 reflects a full year of interest
expense associated with the senior subordinated notes and Tecons issued in 1997,
project financing debt relating to the 1997 and 1998 acquisitions and greenfield
projects that commenced  operations,  offset in part by lower  interest  expense
resulting from declining  balances related to other project  financing debt. The
increase in 1997 reflects a full year of interest  expense  associated  with the
senior  subordinated  notes  issued in 1996 and  1997,  project  financing  debt
relating to the 1996 and 1997 acquisitions, interest expense associated with the
senior  subordinated  notes and Tecons  issued in 1997,  offset in part by lower
interest  expense  resulting  from declining  balances  related to other project
financing debt.

     Interest  income  increased 63% in 1998 and 71% in 1997.  The 1998 increase
results primarily from interest income associated with late payments on customer
accounts at the  distribution  businesses,  offset by lower  interest  income at
Shady Point and Chigen 




<PAGE>

due to lower invested  funds.  The 1997 increase  results  primarily from higher
cash  balances as a result of the  issuances  of debt,  common stock and Tecons,
higher cash  balances at Chigen due to the issuance of the $180 million notes in
December  1996,  interest  income  at Eden  and  Edes  associated  with the late
payments on customer  accounts,  and interest on debt service reserves at Indian
Queens and Coral Reef (Light).

     Equity in pre-tax earnings of affiliates  increased 84% in 1998 and 157% in
1997.  The  increase  in 1998 was  primarily  due to a full  year of  equity  in
earnings from Cemig. The increase in 1997 results primarily from the acquisition
of an approximate  13.1% equity interest in Cemig (of which  approximately  3.7%
was sold to a partner in January  1998),  and a full year of equity in  earnings
from a 2.4%  increase  (to an aggregate  of 13.75%) in the  Company's  ownership
interest in Light.

INCOME TAXES.  The Company's  effective tax rate was 32% for 1998 as compared to
29% for 1997 and 37% for 1996.  The lower  rate in 1997 was due  primarily  to a
one-time tax benefit  realized as a result of a reduction in the  statutory  tax
rate of certain foreign countries.

EXTRAORDINARY  ITEM.  During  1998,  Chigen  redeemed $18 million of its 10.125%
notes resulting in an  extraordinary  gain of $4 million,  net of taxes.  During
1997, the Company redeemed its $75 million 9.75% Senior  Subordinated  Notes due
2000 resulting in an extraordinary loss of $3 million, net of taxes.

OUTLOOK. Global electricity markets continue restructuring and are shifting away
from  government-owned  and  government-regulated   electricity  systems  toward
deregulated,  competitive market structures. Many countries have rewritten their
laws and  regulations  to allow  foreign  investment  and private  ownership  of
electricity generation,  transmission or distribution companies.  Some countries
(for example Hungary, Brazil and some of those of the former Soviet Union, among
others) have or are in the process of "privatizing" their electricity systems by
selling  all or  part of  such  to  private  investors.  This  global  trend  of
electricity market restructuring provides significant new business opportunities
for companies like AES.

     Several  states in the U.S.  are also  beginning  to follow this trend.  In
particular,  many regulated U.S. public  utilities have begun to sell or auction
their   generation   capacity.   Substantially   all  of  the  transmission  and
distribution services in the U.S. continue however to be regulated under a state
and Federal regulatory  framework.  In addition,  many states have passed or are
considering new legislation that would permit utility  customers to choose their
electricity  supplier in a competitive  electricity  market  (so-called  "retail
access" or "customer choice" laws).  While each state's plan differs in details,
there are certain  consistent  elements,  including allowing customers to choose
their  electricity  suppliers  by a certain  date (the dates in the  existing or
proposed legislation vary between 1999 and 2003),  allowing utilities to recover
"stranded  assets" (the remaining  costs of uneconomic  generating or regulatory
assets) and a reaffirmation of the validity of contracts like the Company's U.S.
contracts.

     In addition to the potential for state restructuring legislation,  the U.S.
Congress has proposed new Federal  legislation to encourage  customer choice and
recovery of stranded assets.  Federal  legislation  might be needed to avoid the
conflicting  effect  of each  state  acting  separately  to  pass  restructuring
legislation  (with the likely result of uneven market  structures in neighboring
states).  While it is uncertain whether or when Federal legislation dealing with
electricity  restructuring  might be  passed,  the  Company  believes  that such
legislation would not likely have a negative effect on the Company's U.S.
business, and may create opportunities.

     There is also legislation currently before the U.S. Congress to repeal part
or all of the current provisions of the Public Utility  Regulatory  Policies Act
of  1978  ("PURPA")  and of the  Public  Utility  Holding  Company  Act of  1935
("PUHCA"). The Company believes that if such legislation is adopted, competition
in the U.S. for new generation  capacity from  vertically  integrated  utilities
would  increase.  However,  independents  like AES would also be free to acquire
retail utilities.

     As consumers,  regulators  and  suppliers  continue the debate about how to
further decrease the regulatory aspects of providing electricity  services,  the
Company  believes in and is encouraging  


<PAGE>

the continued  orderly  transition  to a more  competitive  electricity  market.
Inherent  in  any  significant  transition  to  competitive  markets  are  risks
associated with the competitiveness of existing regulated enterprises,  and as a
result, their ability to perform under long-term contracts such as the Company's
electricity  sale contracts.  Although AES strongly  believes that its contracts
will be honored,  there can be no  assurance  that each of its  customers,  in a
restructured and competitive  environment,  will be capable in all circumstances
of fulfilling their financial and legal obligations.

     AES's  investments  and  involvement in the development of new projects and
the acquisition of existing power plants and distribution companies in locations
outside the U.S. are  increasing.  The financing,  development  and operation of
such businesses may entail significant political and financial uncertainties and
other  structuring  issues  (including  uncertainties  associated with the legal
environments,  with first-time  privatization efforts in the countries involved,
currency  exchange  rate  fluctuations,   currency  repatriation   restrictions,
currency  inconvertibility,  political instability,  civil unrest and, in severe
cases, possible  expropriation).  Although AES attempts to minimize these risks,
these  issues  have  the  potential  to cause  substantial  delays  or  material
impairment  to the  value of the  project  being  developed  or  business  being
operated.

     It is  also  possible  that  as more of the  world's  markets  move  toward
competition, an increasing proportion of the Company's revenues may be dependent
on prices determined in electricity spot markets.  In order to capture a portion
of the market share in competitive  generation  markets,  AES is considering and
may elect to invest in and construct low-cost  "merchant" plants (plants without
long-term  electricity sale contracts) in those markets.  Such an investment may
require  the  Company  (as  well  as its  competitors)  to  make  larger  equity
contributions  (as a  percentage  of the  total  capital  cost)  than  the  more
traditional contract-based investments.

     In addition, to the extent that markets allow for retail access or customer
choice,  the Company may enter this new market segment,  either as extensions of
its generation or distribution businesses, or as a separate business enterprise.

     Because of the nature of AES's  operations,  its  activities are subject to
stringent environmental  regulation by relevant authorities at each location. If
environmental laws or regulations were to change in the future,  there can be no
assurance that AES would be able to recover all or any increased  costs from its
customers or that its business and financial  condition  would not be materially
and  adversely  affected.  In  addition,  the  Company or its  subsidiaries  and
affiliates  may  be  required  to  make  significant  capital   expenditures  in
connection  with  environmental  matters.  AES is  committed  to  operating  its
businesses  cleanly,  safely  and  reliably  and  strives  to  comply  with  all
environmental laws, regulations, permits and licenses but, despite such efforts,
at times has been in  non-compliance,  although no such instance has resulted in
revocation of any permit or license. 

YEAR 2000.  There are three  main  elements  in the  provision  of  electricity:
generation,   transmission  and  distribution,  all  of  which  form  a  tightly
integrated  "supplier  chain." In addition,  the Company's  businesses  are also
dependent  on  various  industries  supplying  water,  fuel  and  other  utility
services.  AES,  through its  subsidiaries  and affiliates,  is involved in each
aspect of the supplier  chain in various  countries  throughout  the world.  Set
forth below is information  regarding  AES's efforts to be prepared for problems
associated  with the  potential  inability of many  existing  computer  programs
and/or  embedded  computer chips to recognize the year 2000, both those in AES's
businesses as well as those that AES's businesses depend upon.

     Certain of these statements may constitute  forward-looking  information as
contemplated by the Private Securities  Litigation Reform Act of 1995, including
those regarding AES's expected readiness to handle Year 2000 problems,  expected
capital  expenditures in the areas of remediation and testing,  the future costs
associated  with  business  disruption  caused by supplier or customer Year 2000
problems  and the  success  of any  contingency  plans.  AES  cautions  that its
predictions  of the  extent  of  potential  problems  and the  effectiveness  of
measures designed to address them are based on numerous assumptions,  like those



<PAGE>


regarding  the accuracy of  statements or  certifications  from  critical  third
parties and vendors,  the ability to identify and remediate or replace  embedded
computer chips in affected  equipment,  and resource  availability,  among other
things,  and readers should be aware that actual results might differ materially
from those discussed below.

     AES's  approach  to  analyzing  Year 2000  issues is to (1)  inventory  all
systems  and  equipment  likely  to  be  affected,   (2)  perform  an  inventory
assessment,  (3) conduct  remediations,  (4) test all equipment and systems, and
(5) develop contingency plans to aid in business continuity.

     AES's State of Readiness. In 1998, AES established a readiness program, led
by a senior  executive  and  consisting  of a team of AES people with  extensive
knowledge of AES's  businesses  and  processes,  as well as outside  consultants
experienced  in these  areas who are being used as advisors to assist with third
party analysis and contingency planning.

     AES estimates that it has identified the potential  issues at substantially
all of its generating facilities.  These issues consist of potential problems in
non-information  technology (IT) areas like AES's  distributed  control systems,
programmable  logic  control  systems,  gas and  electricity  metering  systems,
environmental emissions monitoring equipment, backup power systems and telephone
and  security  systems,  as well as more  traditional  IT  areas  like  computer
hardware and software  programs for  accounting,  payroll and billing  services,
among others.

     The  Company's  generation  plants  are  also  significantly  dependent  on
transmission and  distribution  systems to carry the electricity to the ultimate
end users.

     The Company also believes that it has  identified  the potential  issues at
substantially  all  of its  distribution  companies.  These  issues  consist  of
potential problems in the digital relays and meters,  its radio systems,  energy
management  systems,  system control and data  management,  and billing systems,
among others.

     Due to the  interdependent  nature of the supply  chain,  the  Company  has
extended  its   evaluation  of  Year  2000  issues  to  include  key  suppliers,
transmission companies,  customers and vendors, and has sought written assurance
from these  parties  as to their Year 2000  readiness.  The  Company  expects to
complete  steps one  through  four  referred  to above by the end of the  second
quarter of 1999.

     The Company's  businesses are currently working through planned programs in
order to achieve Year 2000 readiness.  These programs  include,  where possible,
actual  simulations  of the Year 2000,  focusing on the key dates that have been
identified  as potential  problems.  A number of  simulations  have already been
conducted with no adverse impacts on those AES businesses.

     Costs of  Addressing  Year 2000  Issues.  Based on internal  analysis,  AES
expects to spend a total of $15 million to $18 million to achieve full Year 2000
readiness company-wide. These amounts reflect AES's portion of expected costs to
make its businesses Year 2000 ready,  but not  necessarily the costs  associated
with post-Year 2000 corrective actions or damage, if any. The Company expects to
fund these expenditures through internal sources.

     Risks of Year 2000 Failures.  Failures by each of the Company's  generation
and  distribution  companies  to address  Year 2000 issues may lead to numerical
errors that,  if not  addressed  or  mitigated,  may cause  system  malfunctions
resulting in the  inability to deliver  electricity  or the inability to collect
data necessary for proper billing and tariff calculations, among other things.

     The  Company's  generating   businesses  may  also  be  unable  to  deliver
electricity because of the failure of the interconnected  distribution companies
to receive or transmit the electricity.  Conversely,  the Company's distribution
companies may not receive  sufficient  electricity to deliver to their customers
because of failures  by  supplying  generators.  In such  instances  of business
interruption  due to supplier or customer  default,  the Company will pursue all
contractual  remedies  available  to it to minimize the impact on its results of
operations;  however,  there can be no assurance  that,  in all  instances,  the
Company will be able to legally  protect itself from damages  arising from third
party Year 2000  failures.  Because of the  significant  interdependency  of the
supplier chain, the Company cannot guarantee that services will be uninterrupted
nor can it  adequately  predict a reasonably  likely worst case  scenario  until
substantially all of the testing phase is completed.

     Contingency  Plans.  The  Company  (together  with  appropriate  interested
parties like transmission companies, independent system operators and government
agencies)  is  still in the  process  of  identifying  and  testing  appropriate
contingency  plans addressing  emergency  operations,  disaster  recovery,  data
preservation and business  continuation plans, and intends to have them in place
by the fourth  quarter of 1999.  The plans will be  continuously  refined as new
information becomes available.

<PAGE>

FINANCIAL POSITION AND CASH FLOWS

At December 31,  1998,  AES had negative  consolidated  working  capital of $722
million  as  compared  to $14  million  at the end of  1997.  The  increase  was
primarily  due to increases  in the current  portion of project  financing  debt
discussed later under "Capital Resources and Liquidity."

     Property, plant and equipment, net of accumulated depreciation,  was $5,504
million at December 31, 1998, up from $4,149 million at the end of 1997. The net
increase of $1,355 million (33%) is primarily  attributable to the  acquisitions
during 1998 and the continuation of construction  activities at Warrior Run, Mt.
Stuart and Uruguaiana and the commencement of construction at Merida.

     Other assets  increased $453 million (13%) to $4,023 million  primarily due
to payments for deferred  financing costs associated with debt issued during the
year, additional capitalized amounts associated with projects in development and
early stage  construction,  the  acquisition  of a 49% share of the Orissa Power
Generation  Corporation (OPGC) and undistributed  earnings from Cemig,  deferred
foreign  currency  losses that will be recovered  through tariff  adjustments as
provided  for in certain  power sales  contracts,  the  purchase of a concession
contract  associated  with the  acquisition  of Edelap,  and  goodwill  from the
purchase of Southland,  offset by reductions in the carrying values of Cemig and
Light and the concession contract at Sul due to the devaluation of the Brazilian
Real.

     Project  financing  debt,  net of  repayments,  increased  as a  result  of
additional borrowings  associated with the acquisitions of Clesa,  Southland and
Edelap and additional  borrowings  associated with  construction at Warrior Run,
Barry, Mt. Stuart, Uruguaiana and Merida.

     Other notes payable  (non-current)  increased  $548 million (50%) to $1,644
million as a result of the issuances of additional  debt to finance current year
acquisitions.  


OPERATING  ACTIVITIES.  Cash flows provided by operating activities totaled $528
million  during 1998 as compared to $193  million  during 1997 and $195  million
during 1996. The 1998 increase was caused primarily by a significant increase in
net  income,  an  increase  in  distributions  from  affiliates,  and changes in
consolidated working capital. The decrease in 1997 was primarily due to a larger
portion of net income being derived from undistributed  earnings from affiliates
and increased net working capital  (excluding  project financing debt) necessary
to support electricity sales at AES's distribution businesses.  Unrestricted net
cash flow to the parent company,  after cash paid for general and administrative
costs and project development  expenses but before investments and debt service,
amounted to  approximately  $360 million,  $259 million and $165 million for the
years ended December 31, 1998, 1997 and 1996, respectively.

INVESTING  ACTIVITIES.  Net cash used in  investing  activities  totaled  $1,842
million in 1998 compared to $3,799 million during 1997 and $1,135 million during
1996. The 1998 amount was caused primarily by construction activities at various
projects and the acquisitions of Clesa,  Southland,  Edelap, OPGC, Telasi and an
additional 5.6% of Sul. These investing uses were offset,  in part, by the sales
of  Hazelwood,  approximately  3.7% of the  Company's  investment in Cemig and a
minority  interest  of  30%  of  Edelap.  The  1997  amount  primarily  reflects
construction  activity at Barry,  Lal Pir, Pak Gen, Warrior Run, and Mt. Stuart,
an additional purchase of Light shares (2.4%),  acquisition of a 60% interest in
each of Eden and Edes,  the  acquisition  of an  approximate  13.1%  interest in
Cemig,  acquisition of Destec's  international assets, the acquisition of 90% of
Sul,  acquisition  of an 85% interest in Altai,  and the funding of debt service
reserves related to Chigen.  The 1996 amount primarily reflects the acquisitions
of San Juan, Tisza and Ekibastuz,  the Light investment construction progress at
Lal Pir,  Pak Gen,  Warrior  Run and  Barry,  Chigen's  investments  in  various
projects,   reimbursable   payments  for  contracts  related  to  a  project  in
development;  and the funding of debt service reserves for the project financing
of the Light investment.

FINANCING  ACTIVITIES.  Net cash  provided by  financing  activities  aggregated
$1,503  million  during  1998  compared to $3,723  million  during 1997 and $886
million during 1996. The 1998 activity was caused  primarily by the borrowing of
bank and other project debt associated with the  acquisitions,  issuance of $350
million  of  corporate  long-term  debt and $200  million  of  common  stock and
borrowings under the Revolver.  These financing sources were partially offset by
repayments of acquisition  related  bridge loans and scheduled debt  repayments.
The 1997 increase was primarily  due to the issuance of project  financing  debt
drawn under  construction  financing  commitments or associated with acquisition
financings,  the issuance of senior  subordinated  notes, the issuance of Tecons
and common stock,  and  contributions  from minority  partners.  These financing
inflows  were  offset  by  project  financing  debt  amortization  payments  and
refinancing  and repayments  under the Company's  revolving line of credit.  The
significant cash financing  inflows in 1996 were the result of construction loan
borrowings for Lal Pir, Pak Gen and Warrior Run, project  acquisition  financing
of the Light  investment,  issuance  of $250  million of 10.25%  Notes,  initial
project  financing  at San  Nicolas,  and net  borrowings  under  the  Company's
revolving  line of  credit.  Significant  cash  financing  outflows  were due to
scheduled debt amortization of the project financings.


<PAGE>
CAPITAL RESOURCES, LIQUIDITY AND MARKET RISKS

CAPITAL RESOURCES AND LIQUIDITY  

AES's  business is capital  intensive and requires  significant  investments  to
develop or acquire new operations. Occasionally, AES will also seek to refinance
certain  outstanding  project financing loans or other notes payable.  Continued
access to capital on competitive and acceptable terms is therefore a significant
factor in the  Company's  ability  to expand  further.  AES has,  to the  extent
practicable,  utilized project financing loans to fund the capital  expenditures
and  investments  required to construct  and acquire its electric  power plants,
distribution  companies and related  assets.  Project  financing  borrowings are
substantially  non-recourse to other  subsidiaries  and affiliates and to AES as
the parent  company and are  generally  secured by the capital  stock,  physical
assets, contracts and cash flow of the related subsidiary or affiliate.

     The Company intends to continue to seek, where possible,  such non-recourse
project  financing in connection with the assets or businesses which the Company
or its  affiliates  may  develop,  construct or acquire.  However,  depending on
market conditions and the unique characteristics of individual  businesses,  the
Company's providers of project financing,  particularly multinational commercial
banks or public market bond  investors,  may seek higher  borrowing  spreads and
increased equity contributions.

     Furthermore,  because of the reluctance of commercial lending  institutions
to provide non-recourse  project financing (including financial  guarantees) for
businesses in certain less developed economies,  the Company, in such locations,
has and will  continue  to seek direct or indirect  (through  credit  support or
guarantees)  project  financing from a limited  number of government  sponsored,
multilateral or bilateral international financial institutions or agencies. As a
precondition to making such project financing available,  these institutions may
also require  governmental  guarantees of certain project and sovereign  related
risks.  Depending on the policies of specific  governments,  such guarantees may
not be offered,  and as a result,  AES may determine that  sufficient  financing
will  ultimately  not be available to fund the related  business,  and may cease
development or acquisition of such business.

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

     At  December  31,  1998,  the  current  portion of project  financing  debt
included $1,053 million of short-term loans incurred to finance the acquisitions
of Sul ($729  million)  in Brazil and Eden,  Edes and Edelap  ($324  million) in
Argentina.  The  Company's  intention  is to replace  such loans with  long-term
project  financing  loans  with  terms  that  more  appropriately   reflect  the
underlying long-term concessions. As a result of the current economic conditions
in those countries, including the significant devaluation of the Brazilian Real,
the  Company  expects  that it will  not be able to  refinance  certain  of such
project financing loans on terms (interest rates,  maturity or amounts) that AES
would consider acceptable without making significant additional investments.  In
such circumstances, AES, as the parent company, would provide additional amounts
in the form of equity  investments,  or intercompany  loans or additional credit
support  to repay  some or all of the  existing  short-term  acquisition  loans.
Depending on the magnitude of such additional  investments or loans, the Company
may also need to issue additional debt, common stock or other similar securities
to fund such additional contributions.

     Interim needs for shorter-term and working capital  financing at the parent
company  have  been met with  borrowings  under  AES's  Revolver.  Over the past
several  years,  the Company has  continued  to increase the amount of available
financing  under the Revolver.  The Company  currently  maintains a $600 million
credit limit under the Revolver. Under the terms of the Revolver, the Company is
required to reduce its direct borrowings to $225 million for 30 consecutive days
during each twelve month period. The Revolver also includes financial  covenants
related to net worth,  cash flow,  investments,  financial  leverage and certain
other obligations and limitations on cash dividends.  At December 31, 1998, cash
borrowings and letters of credit outstanding under the Revolver amounted to $233
million and $194 million,  respectively.  The Company may also seek from time to
time to meet some of its  short-term and interim  funding needs with  additional
commitments  from  banks  and  other  financial  institutions  at the  parent or
subsidiary level.

     The  ability  of AES's  subsidiaries  and  affiliates  to  declare  and pay
dividends to AES is  restricted  under the terms of existing  project  financing
debt  agreements.  See  Note  5 to the  consolidated  financial  statements  for
additional  information.  In connection with its project  financings and related
contracts,   AES  has  expressly  undertaken  certain  limited  obligations  and
contingent  liabilities,  most  of  which  will  only  be  effective  or will be
terminated  upon  the  occurrence  of  future  events.   AES's  obligations  and
contingent  liabilities  in certain cases take the form of, or are supported by,
letters of credit.  These  obligations  and  contingent  liabilities,  excluding
future  commitments  to invest and those  collateralized  with  letter of credit
obligations  under the Revolver,  were limited by their terms as of December 31,
1998 to an 


<PAGE>

aggregate of  approximately  $399 million.  The Company is obligated under other
contingent  liabilities which are limited to amounts, or percentages of amounts,
received by AES as distributions from its project subsidiaries. These contingent
liabilities aggregated $33 million as of December 31, 1998. In addition, AES has
expressly undertaken certain other contingent obligations which the Company does
not expect to have a material  adverse  effect on its results of  operations  or
financial position,  but which by their terms are not capped at a dollar amount.
Because  each  of  the   Company's   businesses   are   distinct   entities  and
geographically  diverse and because the obligations related to a single business
are based on contingencies of varying types, the Company believes it is unlikely
that it will be called upon to perform under several of such  obligations at any
one time.

     At  December  31,  1998,  the  Company  has  future   commitments  to  fund
investments  in  its  projects  under  construction  and in  development  of $37
million.  Of this  amount,  $18 million in letters of credit  under the Revolver
have been issued to support a portion of these obligations. The remaining future
capital commitments are expected to be funded by internally-generated cash flows
and by  external  financings  as may be  necessary.  

MARKET RISKS

The  Company  attempts,  whenever  possible,  to hedge  certain  aspects  of its
projects  against the effects of  fluctuations  in  inflation,  interest  rates,
exchange  rates  and  energy  prices.  Because  of  the  complexity  of  hedging
strategies and the diverse  nature of AES's  operations,  its results,  although
significantly  hedged,  will likely be somewhat  and in certain  cases,  such as
Brazil,  materially  affected  by  fluctuations  in  these  variables  and  such
fluctuations  may result in material  improvement or  deterioration of operating
results.  Results of  operations  would  generally  improve  with higher oil and
natural gas prices and with lower  interest  rates.  Operating  results are also
sensitive to the  difference  between  inflation and interest  rates,  and would
generally  improve  when  increases in  inflation  are higher than  increases in
interest rates. As discussed under "Results of Operations" and below, the recent
devaluation of the Brazilian Real will have a material  negative impact on AES's
results of operations in 1999.

     AES has generally structured the energy payments under its power generation
sales  contracts to adjust with similar price  indices as do its contracts  with
the fuel suppliers for the  corresponding  power plants. In some cases a portion
of revenues is associated with operations and maintenance  costs, and as such is
usually indexed to adjust with inflation.

     AES primarily  consists of businesses  with  long-term  contracts or retail
sales  concessions.  While the  contract-based  portfolio  is  expected to be an
effective hedge against future energy and electricity  market price risks, it is
worth  noting  that a portion of AES's  current  and  expected  future  revenues
(particularly those related to certain portions of its generation  businesses in
Kazakhstan,  the UK,  Argentina,  Hungary and Texas) are derived from businesses
without  significant  long-term revenue contracts.  In some of these businesses,
AES has taken additional steps to improve their predictability, in the Company's
opinion,  by using other  contractual  hedging  provisions such as entering into
fuel supply  contracts that absorb a significant  portion of the  variability in
electricity sales prices. Despite these mitigating factors,  increasing reliance
on  non-contract  businesses  in AES's  portfolio  does  subject  the Company to
potentially increasing electricity market price volatility.

     The  hedging  approaches  and  methodologies  utilized  by the  Company are
implemented  through contractual  provisions with fuel suppliers,  international
financial  institutions  and several of the  Company's  customers.  As a result,
their  effectiveness is dependent,  in part, on each  counterparty's  ability to
perform in accordance with the provisions of the relevant contract.  The Company
has sought to reduce this credit risk in part by entering into contracts,  where
possible,  with  creditworthy  organizations.  In certain  instances,  where the
Company determines that additional credit support is necessary, AES will seek to
execute  (either  concurrently  or  subsequently)  standby,  guarantee or option
agreements with creditworthy third parties. In particular,  AES has executed and
is  the   beneficiary  of  fuel  purchase  option   agreements,   corporate  and
governmental  guarantees to support the  obligations  of local fuel suppliers in
several  locations  and  sovereign   governmental   guarantees   supporting  the
electricity purchase obligation of government-owned  power authorities,  such as
in the Dominican Republic and Pakistan.

     AES has also used a hedging strategy in an attempt to insulate each plant's
financial  performance,  where appropriate,  against the risk of fluctuations in
interest rates.  Depending on whether  capacity  payments are fixed or vary with
inflation,  the  Company  generally  attempts  to hedge  against  interest  rate
fluctuations by arranging  fixed rate or variable rate financing,  respectively.
In certain  cases,  the  Company  executes  interest  rate  swap,  cap and floor
agreements  to  effectively  fix or limit  the  interest  rate  exposure  on the
underlying  variable rate  financing.  At December 31, 1998, the Company and its
subsidiaries had approximately $2,505 million of fixed rate debt obligations. In
addition, the Company had entered into interest rate swap agreements and forward
interest  rate swap  agreements  aggregating  approximately  $1,366  million  at
December 31, 1998, which the Company used to hedge its interest rate exposure on
variable rate debt.

     Through its equity investments in foreign subsidiaries and affiliates,  AES
operates  in  jurisdictions  dealing  in  currencies  other  than the  Company's
consolidated  reporting currency, the U.S. Dollar. Such investments and advances
were made to fund capital  investment or  acquisition  requirements,  to provide
working  capital,  or to provide  collateral  for  contingent  obligations.  Due
primarily to the  long-term  nature of certain  investments


<PAGE>

and  advances,   the  Company  accounts  for  any  adjustments   resulting  from
translation  as  a  charge  or  credit  directly  to  a  separate  component  of
stockholders'  equity  until such time as the  Company  realizes  such charge or
credit.  At  that  time,  differences  may be  recognized  in the  statement  of
operations as gains or losses.

     In addition,  certain of the Company's foreign  subsidiaries and affiliates
have entered into monetary obligations in U. S. Dollars or currencies other than
their  own  functional  currencies.  When  monetary  assets or  obligations  are
incurred  in a  currency  other  than  a  foreign  subsidiary's  or  affiliate's
functional  currency,  that entity may be exposed to reporting  foreign currency
transaction gains or losses based on fluctuations  between the relative value of
that  entity's  functional  currency and the  currency of the monetary  asset or
liability.  Whenever  possible,  these  subsidiaries  have  attempted  to  limit
potential  foreign  exchange  exposure by entering into revenue  contracts which
adjust to changes in the foreign exchange rates.  Certain foreign affiliates and
subsidiaries  operate in countries  where the local  inflation rates are greater
than U.S.  inflation  rates. In such cases the foreign currency tends to devalue
relative to the U.S. Dollar over time. The Company's subsidiaries and affiliates
have  entered  into  revenue   contracts  which  attempt  to  adjust  for  these
differences;  however,  there can be no  assurance  that such  adjustments  will
compensate for the full effects of currency devaluation, if any.

     At December 31, 1998, the Company,  and its subsidiaries had  approximately
$613 million in outstanding  debt that was denominated in currencies  other than
the U.S.  Dollar and  approximately  $574 million in  outstanding  debt that was
denominated  in  currencies  other  than the  relevant  subsidiary's  functional
currency. In addition, certain Brazilian Businesses whose functional currency is
the Brazilian Real have (after adjusting for AES's ownership  percentages)  U.S.
Dollar demoninated debt that amounts to $439 million.

     As discussed in "Results of Operations,"  the Brazilian Real  experienced a
significant  devaluation  in early 1999. As a result,  the Brazilian  Businesses
will also experience  noncash,  foreign currency  transaction  losses associated
with the  impact of changes in the value of the  Brazilian  Real on the  foreign
currency  (non-functional  currency)  denominated debt (primarily U.S.  Dollars)
within the Brazilian Businesses. If the exchange rate of 1.79 Brazilian Reais to
the dollar (the closing exchange rate on February 3, 1999) were to prevail until
the end of 1999,  the  Company  estimates  that its  proportionate  share of the
after-tax foreign currency transaction loss would be approximately $105 million.
In  addition,   such   devaluation   would  result  in  a  related  increase  of
approximately  $760 million in the balance of the  cumulative  foreign  currency
translation adjustment reflected as a reduction of stockholders' equity; as well
as a corresponding  reduction in the carrying value of the related assets. These
estimates  do not reflect  the  likelihood  of  additional  fluctuations  in the
exchange rates.

     The  table  on the next  page  provides  information  about  the  Company's
financial instruments and derivative financial instruments that are sensitive to
changes in interest rates, in particular, debt obligations, Tecons, and interest
rate swaps.  AES does not trade in these  financial  instruments and derivatives
and therefore has classified  them as other than trading.  For debt  obligations
and Tecons, the table presents principal cash flows and related weighted average
interest  rates by  expected  matur  ity  dates  over the next  five  years  and
thereafter.  For interest rate swaps, the table presents  aggregate  contractual
notional  amounts and weighted  average interest rates over the next five years.
Notional amounts are used to calculate the contractual  payments to be exchanged
under the contract. Weighted average variable rates are based on implied forward
rates in the yield curve at December 31, 1998.  The  information is presented in
U.S.  Dollar  equivalents,  which  is  the  Company's  reporting  currency.  The
instruments'  actual cash flows are denominated in U.S. Dollars (USD),  Japanese
Yen (JPY),  Australian  Dollars (AUD),  Chinese  Renminbi Yuan (CHY),  UK Pounds
Sterling (GBP),  Indian Rupees (INR),  Hungarian Forints (HUF), and German Marks
(DEM) as indicated in parentheses as of December 31, 1998.



<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
====================================================================================================================================
FINANCIAL INSTRUMENTS                                                                   THERE-       1998        1997        1998
By expected maturity date                   1999     2000     2001     2002    2003      AFTER      TOTAL       TOTAL     FAIR VALUE
====================================================================================================================================
<S>                                       <C>       <C>      <C>     <C>      <C>        <C>       <C>         <C>          <C>
Debt (USD equivalents in millions, 
     except interest rates) 
Long-term debt:
  Fixed rate (USD)                           75        52       54      19       23      2,173     2,396       2,077       2,410
   Average interest rate                    9.6%      9.7%    10.1%   10.7%    11.2%       8.8%      8.9%        9.4%         --
  Variable rate (USD)                     1,268       448      199     200      177      1,217     3,509       2,516       3,509
    Average interest rate                   8.0%      7.4%     7.5%    7.5%     7.3%       6.5%      7.3%        7.8%         --
  Fixed rate (JPY)                            7         7        7       7        7         23        58          54          59
    Average interest rate                   2.5%      2.5%     2.5%    2.5%     2.5%       2.5%      2.5%        2.5%         --
  Variable rate (JPY)                        28        28       28      28       28         96       236         213         236
    Average interest rate                   3.5%      3.5%     3.5%    3.5%     3.5%       3.5%      3.5%        3.8%         --
  Variable rate (GBP)                         4         7        7      12       16        137       183         176         183
     Average interest rate                  7.3%      7.3%     7.3%    7.3%     7.3%       7.2%      7.2%        8.9%         --
  Variable rate (AUD)                         3         4        4       5        5         36        57           5          57
    Average interest rate                   7.1%      7.1%     7.1%    7.1%     7.1%       7.1%      7.1%        7.7%         --
  Fixed rate (CHY)                            3        --       --      --       --         --         3           2           3
    Average interest rate                   7.5%       --       --      --       --         --       7.5%       11.1%         --
  Fixed rate (INR)                           --        --       48      --       --         --        48          --          48
     Average interest rate                   --        --     13.9%     --       --         --      13.9%         --          --
  Variable rate (HUF)                         2        --       --      --       --         --         2          --           2
    Average interest rate                  17.5%       --       --      --       --         --      17.5%         --          --
  Variable rate (DEM)                        15        11       --      --       --         --        26          --          26
    Average interest rate                   4.6%      4.6%      --      --       --         --       4.6%         --          --
------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT                                1,405       557      347     271      256      3,682     6,518       5,043       6,533
------------------------------------------------------------------------------------------------------------------------------------
TECONS
  Fixed rate (USD)                           --        --       --      --       --        550       550         550         657
    Average interest rate                    --        --       --      --       --        5.4%      5.4%        5.4%         --
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
=================================================================================================================================
DERIVATIVE FINANCIAL INSTRUMENTS                                                                                         1998
By aggregate notional amounts outstanding at December 31    1998      1999      2000     2001      2002       2003    FAIR VALUE
=================================================================================================================================
<S>                                                        <C>       <C>      <C>       <C>       <C>       <C>         <C> 
INTEREST RATE SWAPS (USD equivalents in millions,         
     except interest rates)                               
  Variable rate (USD)                                        944      715       762       708        646       587        101
    Average pay rate                                        8.04%    7.80%     7.66%     7.62%      7.61%     7.56%        --
    Average receive rate                                    5.07%    5.00      5.21%     5.28%      5.40%     5.40%        --
  Variable to fixed (GPB)                                    182      182       182       182        182       182         11 
    Average pay rate                                        6.15%    6.17%     6.17%     6.17%      6.17%     6.17%        --
    Average receive rate                                    5.95%    5.17%     5.47%     5.39%      5.27%     5.20%        --
  Variable to fixed (AUD)                                     54       52        48        35         31        28          8 
    Average pay rate                                        7.38%    7.38%     7.38%     7.38%      7.38%     7.38%        --
    Average receive rate                                    4.80%    5.02%     5.43%     4.97%      5.63%     6.60%        --
---------------------------------------------------------------------------------------------------------------------------------
TOTAL                                                      1,180      949       992       925        859       797        120
=================================================================================================================================
</TABLE>


<PAGE>

     The  table  below  provides   information  about  the  Company's  financial
instruments by functional  currency and presents such information in U.S. Dollar
equivalents.  The table summarizes information on instruments that are sensitive
to foreign currency exchange rates.

     These instruments are debt obligations of the Company's  subsidiaries which
are denominated in currencies other than that subsidiary's  functional currency.
AES does not trade in these  financial  instruments and therefore has classified
them as other than trading.  Such  functional  currencies  include the Argentine
Peso (ARS),  the  Pakistan  rupee (PKR),  and the U.S.  Dollar  (USD).  For debt
obligations,  the table  presents  principal  cash  flows and  related  weighted
average  interest  rates by expected  maturity dates for the next five years and
thereafter.

<TABLE>
<CAPTION>
December 31, 1998
====================================================================================================================================
FINANCIAL INSTRUMENTS                                                                      THERE-       1998     1997       1998
By expected maturity date                   1999     2000      2001      2002     2003      AFTER      TOTAL    TOTAL    FAIR VALUE
====================================================================================================================================
<S>                                        <C>      <C>       <C>      <C>        <C>        <C>      <C>       <C>       <C>
LIABILITIES (USD equivalents in millions, 
     except interest rates) 
LONG-TERM DEBT:
ARS Functional Currency:
  Fixed rate (USD)                            61       34        10        --       --         --       105        67         101
    Average interest rate                    9.4%     9.2%     10.2%       --       --         --       9.4%     10.3%         --
  Variable Rate (USD)                          3        3         1        --       --         --         7         9           7
    Average interest rate                   10.1%    10.1%     10.1%       --       --         --      10.1%     10.6%         --
PKR Functional Currency:
  Fixed rate (USD)                             7        7         7         8        8         41        78        78          78
    Average interest rate                    8.7%     8.8%      8.9%      9.0%     9.0%      10.0%      9.5%      9.2%         --
  Variable rate (USD)                          6        6         7         7        7         32        65        56          65
    Average interest rate                    8.4%     8.4%      8.4%      8.5%     8.5%       8.6%      8.5%      8.8%         --
  Fixed rate (JPY)                             7        7         7         7        7         22        57        54          59
    Average interest rate                    2.5%     2.5%      2.5%      2.5%     2.5%       2.5%      2.5%      2.5%         --
  Variable rate (JPY)                         28       28        28        28       28         96       236       213         236
    Average interest rate                    3.5%     3.5%      3.5%      3.5%     3.5%       3.5%      3.5%      3.8%         --
USD Functional Currency:
  Variable rate (DEM)                         15       11        --        --       --         --        26        --          26
    Average interest rate                    4.6%     4.6%       --        --       --         --       4.6%       --          --
------------------------------------------------------------------------------------------------------------------------------------
TOTAL                                        127       96        60        50       50        191       574       477         572
====================================================================================================================================
</TABLE>


<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS

     (a) Financial Statements:

     The Company's consolidated balance sheets as of December 31, 1998 and 1997,
and the related consolidated statements of operations,  changes in stockholders'
equity and cash flows for each of the three years in the period  ended  December
31, 1998.




<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 (the Company) as of December 31, 1998 and 1997, and
the related  consolidated  statements of  operations,  changes in  stockholders'
equity,  and cash flows for each of the three years in the period ended December
31, 1998.  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  as of  December  31,  1998  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP


Washington, DC
February 4, 1999


<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                             (in millions, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
 FOR THE YEARS ENDED DECEMBER 31                                                             1998            1997            1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>             <C>            <C>
REVENUES:
Sales                                                                                       $ 2,382         $ 1,361         $   824
Services                                                                                         16              50              11
------------------------------------------------------------------------------------------------------------------------------------
Total revenues                                                                                2,398           1,411             835
------------------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales                                                                                 1,579             940             495
Cost of services                                                                                  8              41               7
Selling, general and administrative expenses                                                     56              45              35
Provision to reduce contract receivables                                                         22              17              20
------------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses                                                            1,665           1,043             557
------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME                                                                                733             368             278
OTHER INCOME/(EXPENSE):
Interest expense                                                                               (485)           (244)           (144)
Interest income                                                                                  67              41              24
Foreign currency exchange loss                                                                   (1)             (7)             --
Equity in pre-tax earnings of affiliates                                                        232             126              49
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST, AND EXTRAORDINARY ITEM                           546             284             207
INCOME TAXES                                                                                    145              77              74
MINORITY INTEREST                                                                                94              19               8
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM                                                                307             188             125
Extraordinary item - gain/(loss) on extinguishment
of debt - net of applicable income taxes/(benefit)                                                4              (3)             --
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME                                                                                  $   311         $   185         $   125
====================================================================================================================================

BASIC EARNINGS PER SHARE:
BEFORE EXTRAORDINARY ITEM                                                                   $  1.73         $  1.13         $  0.83
EXTRAORDINARY ITEM                                                                             0.02           (0.02)             --
------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE                                                                    $  1.75         $  1.11         $  0.83
====================================================================================================================================

DILUTED EARNINGS PER SHARE:
BEFORE EXTRAORDINARY ITEM                                                                   $  1.67         $  1.11         $  0.80
EXTRAORDINARY ITEM                                                                             0.02           (0.02)             --
------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE                                                                  $  1.69         $  1.09         $  0.80
====================================================================================================================================
</TABLE>

                 See notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
                                                                   (in millions)
================================================================================
DECEMBER 31                                                 1998           1997
================================================================================
<S>                                                      <C>           <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                $    491      $    302
Short-term investments                                         35           127
Accounts receivable, net                                      365           323
Inventory                                                     119            95
Asset held for sale                                            --           139
Receivable from affiliates                                     18            23
Deferred income taxes                                          71            47
Prepaid expenses and other current assets                     155           134
-------------------------------------------------------------------------------
Total current assets                                        1,254         1,190

PROPERTY, PLANT AND EQUIPMENT:
Land                                                          135            29
Electric generation and distribution assets                 5,301         3,809
Accumulated depreciation and amortization                    (525)         (373)
Construction in progress                                      593           684
-------------------------------------------------------------------------------
Property, plant and equipment, net                          5,504         4,149

OTHER ASSETS:
Deferred financing costs, net                                 167           122
Project development costs                                     144            87
Investments in and advances to affiliates                   1,933         1,863
Debt service reserves and other deposits                      205           236
Electricity sales concessions and contracts                 1,280         1,179
Goodwill                                                       66            23
Other assets                                                  228            60
-------------------------------------------------------------------------------
Total other assets                                          4,023         3,570
-------------------------------------------------------------------------------
TOTAL                                                    $ 10,781      $  8,909
================================================================================
</TABLE>

                See notes to consolidated financial statements.

<PAGE>

<TABLE>
<CAPTION>
                                                                                        (in millions, except par value)
=======================================================================================================================
December 31                                                                                  1998                 1997
=======================================================================================================================
<S>                                                                                      <C>                   <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                                                           $  215              $   205
Accrued interest                                                                              113                   68
Accrued and other liabilities                                                                 235                  335
Other notes payable - current portion                                                           8                   --
Project financing debt - current portion                                                    1,405                  596
-----------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                   1,976                1,204

LONG-TERM LIABILITIES:
Project financing debt                                                                      3,597                3,489
Other notes payable                                                                         1,644                1,096
Deferred income taxes                                                                         268                  273
Other long-term liabilities                                                                   220                  291
-----------------------------------------------------------------------------------------------------------------------
Total long-term liabilities                                                                 5,729                5,149

MINORITY INTEREST                                                                             732                  525
COMMITMENTS AND CONTINGENCIES (NOTE 6)                                                         --                   --
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
  PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING
  SOLELY JUNIOR SUBORDINATED DEBENTURES OF AES                                                550                  550
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: 1998 - 180.4 million;
  1997 - 175.0 million)                                                                         2                    2
Additional paid-in capital                                                                  1,243                1,030
Retained earnings                                                                             892                  581
Accumulated other comprehensive loss                                                         (343)                (131)
Treasury stock at cost (1997 - .2 million shares)                                              --                   (1)
-----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                  1,794                1,481
-----------------------------------------------------------------------------------------------------------------------
TOTAL                                                                                     $10,781              $ 8,909
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
                 See notes to consolidated financial statements.


<PAGE>



<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                (in millions, except per share amounts)
=======================================================================================================================
For the Years Ended December 31                                              1998               1997              1996
=======================================================================================================================
<S>                                                                         <C>                <C>               <C>  
OPERATING ACTIVITIES:
Net income                                                                   $311               $185              $125
Adjustments to net income:
  Depreciation and amortization                                               196                114                65
  Provision for deferred taxes, net of equity investee taxes                   67                 20                26
  Undistributed earnings of affiliates, net of tax                            (50)               (57)              (20)
  Other                                                                        (6)                22                 6
Changes in consolidated working capital                                        10                (91)               (7)
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                     528                193               195
INVESTING ACTIVITIES:
Property additions                                                           (517)              (511)             (506)
Acquisitions, net of cash acquired                                         (1,623)            (2,454)             (148)
Proceeds from the sales of assets                                             301                 --                --
Sale of short-term investments                                                 94                 77               103
Purchase of short-term investments                                             (2)              (184)              (66)
Affiliate advances and equity investments                                     (69)              (649)             (430)
Project development costs                                                     (57)               (34)              (16)
Debt service reserves and other assets                                         31                (44)              (72)
-----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES                                      (1,842)            (3,799)           (1,135)
FINANCING ACTIVITIES:
Borrowings/(repayments) under the revolver, net                               206               (186)              163
Issuance of project financing debt and other coupon bearing securities      1,843              3,926               802
Repayments of project financing debt and other coupon bearing securities     (668)              (749)              (75)
Payments for deferred financing costs                                         (47)               (34)              (13)
Repayments of other liabilities                                               (71)                (6)               (3)
Contributions by minority interests                                            40                269                10
Sale of common stock                                                          200                503                 2
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                   1,503              3,723               886
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                              189                117               (54)
CASH AND CASH EQUIVALENTS, BEGINNING                                          302                185               239
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, ENDING                                            $491               $302              $185
=======================================================================================================================

SUPPLEMENTAL DISCLOSURES:
Cash payments for interest, net of amounts capitalized                       $415               $201              $134
Cash payments for income taxes, net of refunds                                 24                 31                32
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred purchase price of Cemig shares                                       $--               $528              $ --
Common stock issued for amalgamation of AES Chigen                             --                157                --
Conversion of subordinated debentures to common stock                          --                 --                50
</TABLE>

                 See notes to consolidated financial statements.


<PAGE>


<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                                                                          (in millions)
-----------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31                                             1998                1997              1996
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>              <C>                   <C>
COMMON STOCK
Balance at January 1 and December 31                                    $       2         $        2           $     2
-----------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at January 1                                                       $1,030             $  359            $  292
Issuance of common stock                                                      184                494                --
Issuance of common stock pursuant to Chigen amalgamation                       --                157                --
Issuance of common stock under benefit plans
   and exercise of stock options and warrants                                  16                 12                 3
Tax benefit associated with the exercise of options                            13                  8                15
Issuance of common stock on conversion of 6.5% subordinated
   debentures, net ($13.08 per share)                                          --                 --                49
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31                                                     $1,243             $1,030            $  359
-----------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at January 1                                                      $   581            $   396           $   271
Net income for the year                                                       311                185               125
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31                                                    $   892            $   581           $   396
=======================================================================================================================
ACCUMULATED OTHER COMPREHENSIVE LOSS (cumulative foreign currency translation adjustment)
Balance at January 1                                                      $  (131)           $   (33)          $   (10)
Foreign currency translation adjustment                                      (212)               (98)              (23)
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31                                                    $  (343)           $  (131)          $   (33)
=======================================================================================================================
TREASURY STOCK
Balance at January 1 and December 31                                       $   --           $     (1)          $    (3)
-----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY                                                 $1,794             $1,481            $  721
-----------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income for the year                                                    $  311             $  185            $  125
Foreign currency translation adjustment                                      (212)               (98)              (23)
-----------------------------------------------------------------------------------------------------------------------
Comprehensive Income                                                       $   99             $   87            $  102
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

                 See notes to consolidated financial statements.




<PAGE>

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 owning
and operating  electric  power  generation and  distribution  businesses in many
countries around the world.

     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.  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 to be 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 significant unrealized
gains or losses are recorded as a separate  component of  stockholders'  equity.
Interest and dividends on investments are reported in interest income. Gains and
losses on sales of investments  are recorded  using the specific  identification
method.  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).

     ACCOUNTS   RECEIVABLE  --  Accounts  receivable  include  a  provision  for
uncollectible  amounts of $59  million at  December  31,  1998  associated  with
receivables arising from the Company's  operations in the Dominican Republic and
Kazakhstan,  and $37 million at December 31, 1997  associated  with  receivables
arising from the Company's operations in Kazakhstan.

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

<TABLE>
<CAPTION>
---------------------------------------------
DECEMBER 31               1998       1997
---------------------------------------------

<S>                      <C>       <C>
Coal, fuel oil and
  other raw materials    $ 63      $ 58
Spare parts, materials
  and supplies             56        37
---------------------------------------------
Total                    $119      $ 95
---------------------------------------------
</TABLE>

     PROPERTY, PLANT AND EQUIPMENT -- Property,  plant and equipment,  including
improvements,  is stated at cost.  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  generation and distribution assets and are depreciated
over the useful life of the related components.

     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  generation  and  distribution  assets when the assets are ready for
their intended use.  Interest  capitalized  during  development and construction
totaled  $79  million,  $67  million  and $27  million  in 1998,  1997 and 1996,
respectively.

     INTANGIBLE  ASSETS  --  Goodwill  and  electricity  sales  concessions  and
contracts are amortized on a straight-line basis over their estimated periods of
benefit which range from 15 to 40 years.  Intangible assets at December 31, 1998
and 1997 are  shown  net of  accumulated  amortization  of $39  million  and $13
million, respectively.

     LONG-LIVED  ASSETS  --  The  Company  reviews  its  long-lived  assets  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amounts of such assets may not be recoverable.

     DEFERRED  FINANCING  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  


<PAGE>

interest  method  of  amortization.  Deferred  financing  costs are shown net of
accumulated  amortization of $70 million and $52 million as of December 31, 1998
and 1997, respectively.

     PROJECT   DEVELOPMENT  COSTS  --  The  Company  capitalizes  the  costs  of
developing new projects after achieving certain project related milestones which
indicates that the project is probable.  These costs represent  amounts incurred
for professional services,  salaries, permits, options, capitalized interest and
other related direct costs.  These costs are included in 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
government approvals, siting, financing,  construction,  permitting and contract
compliance.  Certain  reimbursable costs related to a project were classified as
other assets at December 31, 1997 and were recovered in 1998.

     INCOME  TAXES -- The Company  follows  Statement  of  Financial  Accounting
Standards  (SFAS) No.  109,  Accounting  for Income  Taxes.  Under the asset and
liability  method of SFAS No.  109,  deferred  tax  assets and  liabilities  are
recognized for the future tax consequences  attributable to differences  between
the financial  statement carrying amounts of the existing assets and liabilities
and their respective income tax bases.

     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  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.  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 accumulated other  comprehensive loss in the
stockholders' equity section of the balance sheet. For subsidiaries operating in
highly  inflationary  economies,  the  U.S.  Dollar  is  considered  to  be  the
functional   currency,   and  transaction  gains  and  losses  are  included  in
determining  net  income.  Gains  and  losses  that  arise  from  exchange  rate
fluctuations on transactions denominated in a currency other than the functional
currency,  except those that are hedged, are included in determining net income.
Foreign  currency  gains  and  losses  that  will be  recovered  through  tariff
adjustments as provided for in power sales contracts are deferred and recognized
as they are recovered under contract terms.

     During early 1999, the Brazilian Real experienced a significant devaluation
relative to the U.S.  Dollar,  declining from 1.21 Brazilian Reais to the Dollar
at  December  31,  1998 to 1.79 Reais to the Dollar at  February  3, 1999.  This
devaluation will likely result in significant  foreign currency  translation and
transaction losses for the Company in 1999.

     DEFINED  BENEFIT  PLANS -- In  1998,  the  Company  adopted  SFAS No.  132,
Employers'  Disclosures about Pensions and Other Retirement  Benefits.  SFAS No.
132 revises disclosures about pension and other postretirement  benefit plans by
providing  guidance  for a standard  practical  disclosure  format.  It does not
change the measurement or recognition of costs relating to these plans.

     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.  Electricity  distribution
revenues are  recognized  when power is provided.  Most of the  Company's  power
plants rely primarily on one power sales contract with a single customer for the
majority of revenues.  There were no single  customers  which  accounted  for at
least 10% of revenues in 1998,  three customers  accounted for 14%, 12%, and 10%
of revenues in 1997 and five customers  accounted for 20%, 16%, 16%, 11% and 10%
of revenues in 1996. The prolonged  failure of any of these customers to fulfill
contractual  obligations  or make  required  payments  could have a  substantial
negative  impact on AES's revenues and profits.  The Company does not anticipate
non-performance by the customers under these contracts.

     HEDGING   ARRANGEMENTS  --  The  Company  enters  into  various  derivative
transactions in order to hedge its exposure to certain market risks. The Company
currently has  outstanding  interest rate swap, cap and floor  agreements  which
hedge against  interest rate exposure on floating rate project  financing  debt.
These  transactions,  which are classified as other than trading,  are accounted
for as hedges,  and interest is expensed or capitalized,  as appropriate,  using
effective interest rates. Any fees are amortized as yield adjustments.

     NET INCOME PER SHARE -- Basic and diluted net income per share are based on
the weighted average number of shares of common stock and potential common stock
outstanding during the period, after giving effect to stock splits (see Note 8).
Potential common stock, for purposes of determining  diluted earnings per share,
includes the effects of dilutive stock options, warrants,  deferred compensation
arrangements  and convertible  securities.  The effect of such potential  common
stock is computed using the treasury stock method or the if-converted method, as
applicable.

     COMPREHENSIVE  INCOME  -- In  1998,  the  Company  adopted  SFAS  No.  130,
Reporting Comprehensive Income. SFAS No. 130 establishes rules for the reporting
of comprehensive income and its components. Comprehensive income consists of net
income and foreign  currency  translation  adjustments  and is  presented in the
Consolidated  Statements of Changes in Stockholders' Equity for all periods. The
adoption of SFAS No. 130 had no impact on the  previously  reported  balances of
stockholders' equity.

     USE OF ESTIMATES -- The  preparation of financial  statements in conformity
with  generally  accepted  accounting  principles  requires  the Company to make
estimates and assumptions that affect reported 


<PAGE>

amounts of assets and  liabilities  and  disclosures  of  contingent  assets and
liabilities  at the date of the  financial  statements,  as well as the reported
amounts of revenues and expenses  during the reporting  period.  Actual  results
could differ from those estimates.

     RECLASSIFICATIONS  --  Certain  reclassifications  have  been made to prior
period  amounts to conform  with the 1998  presentation.  In 1998,  the  Company
changed its method of reporting earnings from its equity affiliates to a pre-tax
basis. The Company's share of the investee's  income taxes is recorded in income
tax expense. Amounts for 1997 and 1996 have been reclassified to conform to this
presentation (see Note 4).

2. ACQUISITIONS

     In January 1998, a subsidiary of AES acquired an additional  5.6% ownership
interest  in the  former  Companhia  Centro-Oeste  de  Distribuicao  de  Energia
Electrica (Sul), an electric  distribution company in the state of Rio Grande do
Sul,  Brazil.  Previously,  in October  1997,  AES had  acquired  90% of Sul for
approximately $1.4 billion.  The additional  investment in 1998 of approximately
$116 million increased AES's ownership  interest in Sul to 95.6%.  Approximately
$884  million  of the  acquisition  cost  represents  the  value  of the 60 year
electricity  sales  concession  granted to Sul, which is being amortized over 40
years.  Included  in current  liabilities  at  December  31, 1997 is $34 million
associated with severance costs related to the acquisition.

     Also in January  1998, a subsidiary of AES sold  approximately  3.7% of its
equity investment in Companhia Energetica de Minas Gerais (Cemig), an integrated
electric  utility serving the State of Minas Gerais in Brazil for  approximately
$102  million.  Cemig owns  approximately  5,000 MW of  generating  capacity and
serves  approximately  4  million  customers.  In  June  1997,  AES,  through  a
consortium,  acquired, for approximately $1 billion, a 14.41% interest in Cemig.
This investment  represents a 33% voting interest.  Through the consortium,  the
Company has the ability to exercise significant influence over the operations of
Cemig and records the investment using the equity method. After the January 1998
sale of a portion of its equity  investment,  AES's net investment  represents a
9.4% ownership interest in Cemig.

     In February 1998, a subsidiary of the Company  acquired,  for approximately
$97  million,  80% of  Compania  de Luz  Electrica  de  Santa  Ana  (Clesa),  an
electricity  distribution  company in El Salvador,  and subsequently sold 16% of
its interest for approximately $15 million.  At December 31, 1998, the Company's
ownership  interest was 64%.  Approximately  $32 million of the acquisition cost
represents the value of the electricity sales concession granted to Clesa, which
has no expiration date, and is being amortized over 40 years.

     In April 1998, a subsidiary  of AES acquired for no  consideration  a 45 MW
hydroelectric  plant (Caracoles) from the government of the San Juan Province in
Argentina.  The project  represents  the operation,  under a 30 year  concession
agreement,  and  refurbishment,  of  the  hydroelectric  plant  as  well  as the
construction  of a new  230 MW  plant  (Punta  Negra)  at  the  same  site.  The
construction  of Punta  Negra will be funded with cash flows from  Caracoles  as
well as a contribution of approximately  $139 million from the government of San
Juan.  AES will  operate the Punta  Negra  facility  under a 30 year  concession
agreement, at which time the facility will revert to the government of San Juan.

     In May 1998, a subsidiary of AES acquired three natural gas-fired  electric
generating   stations   (Southland)   from   Southern   California   Edison  for
approximately  $786  million.  Approximately  $45 million of the purchase  price
represents goodwill and is being amortized over 40 years.

     In June 1998, a subsidiary  of AES  acquired  approximately  90% of Empresa
Distribuidora de La Plata S.A. (Edelap), an electric distribution company in the
province of Buenos Aires,  Argentina for approximately $355 million. In November
1998, the subsidiary  sold one-third of its 90% interest for  approximately  $61
million and a proportionate  percentage of related  project debt  (approximately
$64 million).  At December 31, 1998,  the Company's  ownership  interest is 60%.
Approximately  $129 million of the acquisition  cost represents the value of the
90 year electricity sales concession agreement, which is being amortized over 40
years.

     In late December 1998, a subsidiary of the Company  acquired a 49% share of
the Orissa Power Generation Corporation (OPGC) a state government-owned  company
in India, for approximately $144 million. The remaining interest is owned by the
Orissa state government.  OPGC owns and operates a 420 MW mine-mouth  coal-fired
power  station.  Also in late December,  the Company  acquired a 75% interest in
Telasi, the electricity  distribution  company of Tbilisi,  Republic of Georgia,
for  approximately  $26  million.  The  Company has not  recorded  any income or
earnings from these two acquisitions  during 1998 because it took over operating
control of both companies in January 1999.

     In January  1997,  the Company  acquired  an  additional  2.4%  interest in
Light-Servicos  de  Electricidade  S.A.  (Light),   a  publicly-held   Brazilian
corporation that operates as the concessionaire of an integrated  electric power
generation,  transmission and  distribution  system which serves Rio de Janeiro,
Brazil. In June 1996, AES and three other partners  participated in a consortium
which acquired a 50.44% controlling interest.  The additional investment in 1997
of  approximately  $82  million,  increased  AES's  holdings in Light to 13.75%.
Through the  consortium,  the  Company  has the ability to exercise  significant
influence  over the  operations  of Light and records the  investment  using the
equity method.

     In May 1997, AES completed its amalgamation  with AES China Generating Co.,
Ltd. (Chigen). As a result of the amalgamation, the Company issued approximately
5 million  shares of AES Common Stock,  valued at $157 million,  in exchange for
all of the out-


<PAGE>

standing  Chigen  Class A  Common  Stock.  Approx  imately  $29  million  of the
transaction  cost represents  values assigned to power purchase  contracts which
are being  amortized  over their  respective  lives,  which  range from 16 to 25
years.

     Also in May 1997, a subsidiary of the Company  acquired 60% of two electric
distribution  companies sold as part of the Argentine  government  privatization
program. The companies purchased were Empresa Distribudora Energia Norte (Eden),
which  serves  the  northern  part of the Buenos  Aires  province,  and  Empresa
Distribudora Energia Sur (Edes), which serves the southern part of the province.
The Company,  together with its partner,  invested approximately $565 million to
acquire a 90% ownership interest in each company.  Approximately $204 million of
the  acquisition  cost  represents  the value of the 95 year  electricity  sales
concessions granted to Eden and Edes, and is being amortized over 40 years.

     In June 1997, AES acquired the international  assets of Destec Energy, Inc.
for approximately $439 million.  The purchase included five electric  generating
plants  in  construction  or  operation  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
(Kingston) (50%); a 405 MW gas-fired  combined cycle plant under construction in
Terneuzen,  Netherlands  (Elsta) (50%); a 140 MW gas-fired simple cycle plant in
Cornwall,  England (Indian Queens) (100%); a 235 MW oil-fired simple cycle plant
in  Santo  Domingo,  Dominican  Republic  (Los  Mina)  (100%);  and a  1,600  MW
coal-fired plant in Victoria,  Australia  (Hazelwood) (20%).  Approximately $172
million of the acquisition cost represents the value of various  contracts which
are being  amortized over the respective  lives which range from 14 to 34 years,
and  a  $67  million   liability  was  accrued  related  to  the  completion  of
construction at Elsta. Construction at Elsta was completed in September 1998.

     The Hazelwood  investment  was  classified as held for sale at December 31,
1997,  and was  subsequently  sold in February  1998.  The Company  recognized a
foreign  currency  transaction  loss  of $5  million  in  1997  related  to this
investment.

     In October  1997, a subsidiary  of the Company  acquired an 85% interest in
two  hydro-electric  stations  (GES) and four combined  heat and power  stations
(TETS) in eastern  Kazakhstan  (Altai).  Altai has a total electric  capacity of
1,384 MW with an additional  equivalent thermal capacity of approximately  1,000
MW.  The  purchase  price  was  approximately  $24  million  for the 20 year GES
concession and the TETS shares.

     These acquisitions were all accounted for as purchases.  The purchase price
allocations for Clesa, Caracoles,  Southland,  Edelap, Telasi and OPGC have been
completed  on  a  preliminary  basis,  subject  to  adjustments  resulting  from
additional facts that may come to light when the engineering, environmental, and
legal  analyses are completed  during the  respective  allocation  periods.  The
accompanying  financial  statements  include the operating results of Clesa from
February 1998,  Caracoles from April 1998,  Southland from May 1998, Edelap from
June 1998, Eden and Edes from May 1997, equity in earnings of Cemig and Kingston
from June 1997,  and the  operating  results of Los Mina and Indian  Queens from
June 1997, and Sul and Altai from October 1997.

     The table below presents supplemental  unaudited proforma operating results
as if all  of the  acquisitions  had  occurred  at the  beginning  of  1997  (in
millions, except per share amounts):

<TABLE>
<CAPTION>
---------------------------------------
For the year ended      1998     1997
---------------------------------------

<S>                   <C>     <C>    
Revenues              $2,498  $ 2,100
Income before
  extraordinary item     304      151
Net income               308      148
Basic earnings
  per share          $  1.74  $  0.89
Diluted earnings
  per share          $  1.68  $  0.87
---------------------------------------
</TABLE>

     The proforma  results are based upon  assumptions  and estimates  which the
Company  believes  are  reasonable.  The  proforma  results do not purport to be
indicative  of the  results  that  actually  would  have been  obtained  had the
acquisitions  occurred  on  January  1,  1997,  nor are  they  intended  to be a
projection of future results.

     In January  1999,  a subsidiary  of the Company  acquired a 49% interest in
three  hydro-electric  generating  facilities  in Panama for  approximately  $91
million.


<PAGE>

3. INVESTMENTS
The  short-term  investments  and debt service  reserves and other deposits were
invested as follows (in millions):
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31                                          1998                1997
================================================================================
RESTRICTED CASH AND CASH EQUIVALENTS (1)           $  108              $  130
--------------------------------------------------------------------------------
<S>                                                    <C>                 <C>
HELD-TO-MATURITY
U.S. treasury and government agency securities         15                  37
Foreign certificates of deposit                         1                  95
Commercial paper                                       95                  66
--------------------------------------------------------------------------------
Subtotal                                              111                 198
--------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. treasury and government agency securities          -                  15
Certificates of deposit                                 -                   2
Commercial paper                                       21                  15
Floating rate notes                                     -                   3
--------------------------------------------------------------------------------
Subtotal                                               21                  35
--------------------------------------------------------------------------------
TOTAL                                              $  240              $  363
================================================================================
</TABLE>

(1) amounts  required  to be  maintained  in cash  in  accordance  with  certain
    covenants of various project financing agreements.

At December 31, 1998 and 1997,  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,  1998 and 1997  classified  as
held-to-maturity and available-for-sale were approximately the same.

Short-term  investments  classified as held-to-maturity  and  available-for-sale
were $16 million and $15 million,  respectively,  at December 31, 1998, and $111
million and $16 million,  respectively,  at December 31, 1997.  Also included in
short-term  investments at December 31, 1998 is restricted cash of approximately
$4 million.  There was no restricted cash in short-term  investments at December
31, 1997.

4. INVESTMENTS IN AND ADVANCES TO AFFILIATES

The Company is a party to joint venture/consortium  agreements through which the
Company  has  equity  investments  in  several  operating  companies.  The joint
venture/consortium  parties generally share operational control of the investee.
The  agreements  prescribe  ownership  and voting  percentages  as well as other
matters.  The Company records its share of earnings from its equity investees on
a pre-tax basis. The Company's share of the investee's  income taxes is recorded
in income tax expense.  The  following  table  represents  summarized  financial
information (in millions) for equity method affiliates on a combined 100% basis.
Amounts  presented  for 1998  include the accounts of  Northern/AES  Energy (45%
owned U.S.  affiliate) and for both 1998 and 1997 include the accounts of NIGEN,
Ltd. (NIGEN) (47% owned UK affiliate),  Medway Power Ltd.  (Medway)(25% owned UK
affiliate),  Light (13.75%  owned  Brazilian  affiliate),  affiliates of Chigen,
Kingston  (50%  owned  Canadian   affiliate),   Elsta  (50%  owned   Netherlands
affiliate),  and Cemig (9.4% and 13.1%,  in 1998 and 1997,  respectively,  owned
Brazilian affiliate).  Amounts presented for 1996 include the accounts of NIGEN,
Medway, Light (11.35% owned Brazilian affiliate), and affiliates of Chigen.
<TABLE>
<CAPTION>
================================================================================
AS OF AND FOR THE YEARS ENDED DECEMBER 31          1998       1997     1996
================================================================================
<S>                                               <C>      <C>       <C>     
Revenues                                          $ 8,091  $ 3,991   $ 1,959 
Operating income                                    2,079      984       497 
Net income                                          1,146      670       383 
Current  assets                                     2,712    1,698       889  
Noncurrent  assets                                 19,025   14,800     4,914
Current  liabilities                                4,809    1,809       863 
Noncurrent  liabilities                             7,356    4,752     2,108
Stockholders' equity                                9,572    9,937     2,832
================================================================================
</TABLE>

     The  Company's  after tax share of  undistributed  earnings  of  affiliates
included in  consolidated  retained  earnings was $50 million and $57 million at
December 31, 1998 and 1997,  respectively.  The Company  charged and  recognized
construction  revenues,   management  fees  and  interest  on  advances  to  its
affiliates which aggregated $19 million, $42 million, and $9 million for each of
the years ended December 31, 1998, 1997 and 1996, respectively.


<PAGE>
5. DEBT
PROJECT  FINANCING DEBT -- Project  financing debt at December 31, 1998 and 1997
consisted of the following (in millions):
<TABLE>
<CAPTION>
======================================================================================
                                                INTEREST      FINAL        DECEMBER 31
                                                 RATE(1)     MATURITY    1998     1997
======================================================================================
<S>                                                <C>        <C>     <C>      <C>   
SENIOR DEBT - VARIABLE RATE
Notes payable to banks                              7.3%       2017    $3,011   $1,830
Commercial paper                                    6.9%       2007       291      598
Debt to (or guaranteed by) multilateral                                               
  or export credit agencies                         5.8%       2010       452      429
SENIOR DEBT - FIXED RATE                                                              
Notes payable to banks                             10.0%       2009       689      623
Capital leases                                      7.6%       2022       135      143
Tax-exempt bonds                                    7.4%       2019        74       74
Chigen bonds                                       10.1%       2006       162      180
Debt to (or guaranteed by) multilateral                                               
  or export credit agencies                         6.5%       2008       135      133
SUBORDINATED DEBT - VARIABLE AND FIXED RATE        12.4%       2014        53       75
--------------------------------------------------------------------------------------
SUBTOTAL                                                                5,002    4,085
Less current maturities                                                (1,405)    (596)
--------------------------------------------------------------------------------------
TOTAL                                                                  $3,597   $3,489
======================================================================================
</TABLE>

(1) weighted average interest rate at December 31, 1998


     Project  financing  debt  borrowings  are primarily  collateralized  by the
capital  stock of the relevant  subsidiary  and in certain  cases,  the physical
assets of and all significant agreements associated with such business.

     The  Company  has  interest  rate  swap  and  forward  interest  rate  swap
agreements  in an  aggregate  notional  principal  amount of $1,366  million  at
December 31, 1998. The swap agreements  effectively change the variable interest
rates on the  portion of the debt  covered by the  notional  amounts to weighted
average fixed rates ranging from  approximately  7.4% to 12.1%.  The  agreements
expire at various dates from 1999 through  2014. In the event of  nonperformance
by the  counterparties,  the Company may be exposed to increased interest rates,
however,  the Company does not anticipate nonper formance by the counterparties,
which  are  multinational   financial   institutions.   At  December  31,  1998,
subsidiaries  of the Company have interest rate cap, floor and forward  interest
rate cap agreements at various rates with remaining terms ranging from one to 18
years in an aggregate notional amount of $1,365 million.

     The commercial paper  borrowings are supported by an irrevocable  letter of
credit issued by a U.S. financial institution. In the event of nonperformance or
credit deterioration of the institution,  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.  

     At  December  31,  1998,  the  current  portion of project  financing  debt
includes $1,053 million of short-term loans incurred to finance the acquisitions
of Sul ($729  million) in Brazil,  and Eden,  Edes and Edelap ($324  million) in
Argentina.  The Company's intention is to replace some or all of such loans with
long-term project financing.


<PAGE>

OTHER  NOTES  PAYABLE -- Other  notes  payable  at  December  31,  1998 and 1997
consisted of the following (in millions):
<TABLE>
<CAPTION>
=======================================================================================================================
                                               Interest        Final          First Call
                                               Rate (1)       Maturity           Date            1998           1997
=======================================================================================================================

<S>                                             <C>           <C>               <C>            <C>          <C>     
Corporate revolving bank loan (1)                 7.21%         2000                --          $  233       $     27
Senior notes                                      8.00%         2008              2000             200             --
Senior subordinated notes                        10.25%         2006              2001             250            250
Senior subordinated notes                         8.38%         2007              2002             325            325
Senior subordinated notes                         8.50%         2007              2002             375            375
Senior subordinated debentures                    8.88%         2027              2004             125            125
Convertible junior subordinated notes             4.50%         2005              2001             150             __
Unamortized discounts                                                                               (6)            (6)
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL                                                                                         1,652          1,096
Less current maturities                                                                             (8)            --
-----------------------------------------------------------------------------------------------------------------------
TOTAL                                                                                           $1,644         $1,096
=======================================================================================================================
</TABLE>

(1) weighted average interest  rate at December 31, 1998 on floating  rate loan.

     Under  the  terms of the $600  million  corporate  revolving  bank loan and
letter of credit  facility  (Revolver),  the  Company  must  reduce  its  direct
borrowings to $225 million for 30 consecutive days annually to obtain additional
loans.  Commitment  fees on the unused portion at December 31, 1998 are .38% per
annum,  and as of that date $173 million was  available.  The  Company's  senior
subordinated notes are general unsecured obligations of the Company.

     The Company's 9.75% senior  subordinated  notes due 2000 were refinanced in
August  1997.  As a result,  the Company  recorded an  extraordinary  loss of $3
million, which is net of a $2 million tax benefit.

     Chigen bonds in the amount of $18 million,  were  redeemed in 1998 prior to
maturity.  As a result,  the Company has  recorded an  extraordinary  gain of $4
million, net of income tax of $2 million.

     FUTURE MATURITIES OF DEBT -- Scheduled maturities of total debt at December
31, 1998 are (in millions):

=====================================
  1999                         $1,413
  2000                            566
  2001                            358
  2002                            282
  2003                            268
  Thereafter                    3,767
-------------------------------------
  TOTAL                        $6,654
=====================================

     COVENANTS  -- The  terms  of the  Company's  Revolver,  senior  and  junior
subordinated  notes  and  project  financing  debt  agreements  contain  certain
restrictive covenants. 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 stockholders.

     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, 1998,  approximately $57 million was available
under project loan documents for distribution by U.S. subsidiaries.


<PAGE>


6. COMMITMENTS AND CONTINGENCIES

OPERATING  LEASES-- As of December  31, 1998,  the Company and its  consolidated
subsidiaries  were obligated under long-term  non-cancelable  operating  leases,
primarily for office rental and site leases. Rental expense for operating leases
was $4 million,  $6 million and $4 million in the years ended December 31, 1998,
1997 and 1996,  respectively.  The future minimum lease  commitments under these
leases  are $4  million  for 1999 and 2000,  $3  million  for 2001 and 2002,  $6
million for 2003, and a total of $71 million for the years thereafter.

     CONTRACTS  -- A subsidiary  of the Company has entered  into  "take-or-pay"
contracts for the purchase of electricity  with a term of up to thirteen  years.
Purchases in 1998 were approximately $214 million.  The future commitments under
these  contracts are $228 million for 1999,  $229 million for 2000, $237 million
for 2001,  $253  million for 2002,  $231  million for 2003 and a total of $1,229
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 1 to 28 years.
One  subsidiary  has entered into a  "take-or-pay"  contract for the purchase of
natural  gas.  Purchases  in 1998 were  approximately  $12  million.  The future
commitments  under this  contract  are $27 million for 1999  through  2002,  $28
million for 2003 and $136 million thereafter.

     In December  1998,  the Company  entered into an agreement  with one of its
electricity  customers  for one of its plants  whereby the customer will buy out
the  remaining  term of the  contract.  The  agreement is subject to  regulatory
approval.  Related  to this  agreement,  the  Company  has either  entered  into
agreements  or is  negotiating  agreements  to  terminate  its  other  long-term
commitments related to the operation of this plant.

     ACQUISITIONS  -- In August 1998,  AES won a bid to acquire six  coal-fired,
electric generating stations from NGE Generation, Inc., an affiliate of New York
State Electric and Gas Corporation,  for approximately $950 million. In November
1998,  AES  agreed to  acquire  the  outstanding  shares of  Cilcorp,  Inc.,  an
integrated  distribution company in Illinois for approximately $885 million. The
Company  anticipates  completion of both of these  acquisitions in 1999, pending
regulatory and other approvals.

     ENVIRONMENTAL  -- The  Company  reviews  its  obligations  as it relates to
compliance with environmental laws,  including site restoration and remediation.
Because  of the  uncertainties  associated  with  environmental  assessment  and
remediation  activities,  future costs of  compliance  or  remediation  could be
higher or lower than the amount currently accrued.  Based on currently available
information,  the Company does not believe that any costs  incurred in excess of
those currently  accrued will have a material effect on the financial  condition
of the Company.

     TRADING  ACTIVITY  COMMITMENTS  -- A  subsidiary  and an  affiliate  of the
Company participate in the trading of electricity forward contracts with various
counterparties  and as a result,  the  Company is exposed to the risk of trading
losses by its  subsidiary or affiliate,  and the risk of  nonperformance  by its
subsidiary,  affiliate  or  counterparties.  The  Company has  provided  limited
guarantees  aggregating $38 million which are included in the amounts  disclosed
below.  The  Company  does  not  anticipate  nonperformance  by its  subsidiary,
affiliate or the counterparties.

     GUARANTEES  --  In  connection  with  certain  of  its  project  financing,
acquisition 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  those  collateralized  by letter of credit  obligations
discussed  below,  were  limited as of December  31,  1998,  by the terms of the
agreements,  to an aggregate of approximately $399 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, 1998. In addition,  the
Company  has  commitments  to  fund  its  equity  in  projects  currently  under
development or in construction.  At December 31, 1998 such commitments to invest
amounted to approximately $19 million.

     LETTERS OF CREDIT -- At December 31, 1998,  the Company had $194 million in
letters of credit  outstanding  under its  Revolver  which  operate to guarantee
performance  relating to certain project  development  activities and subsidiary
operations.  The Company pays a letter of credit fee ranging from 0.75% to 1.50%
on the outstanding  amounts. In addition,  the Company had $29 million in surety
bonds outstanding at December 31, 1998.

     LITIGATION -- The Company is involved in certain legal  proceedings  in the
normal  course of  business.  It is the opinion of the Company  that none of the
pending  litigation  will  have a  material  adverse  effect on its  results  of
operations, financial position, or cash flows.

7. COMPANY OBLIGATED  MANDATORILY  REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
   TRUSTS  
During 1997, two wholly-owned special purpose business trusts (individually, AES
Trust I and AES Trust II and  collectively,  the Trusts) issued Term Convertible
Securities (Tecons). On March 31, AES Trust I issued 5 million of $2.6875 Tecons
(liquidation  value $50) for total  proceeds of $250  million  and  concurrently
purchased $250 million of 5.375% junior subordinated  convertible debentures due
2027 of AES  (individually the 5.375%  Debentures).  On October 29, AES Trust II
issued 6 million of $2.75 Tecons  (liquidation  value $50) for total proceeds of
$300 million and concurrently purchased $300 million of 5.5% junior subordinated
convertible  debentures due 2012 of AES  (individually  the 5.5%  Debentures and
collectively with the 5.375% Debentures the Junior Debentures).  The sole assets
of AES Trust I 


<PAGE>

are the  5.375%  Debentures  and the sole  assets  of AES  Trust II are the 5.5%
Debentures.  The  obligations of the Trusts,  as provided under the terms of the
Tecons, are fully and unconditionally guaranteed by AES.

     Dividends  on the Tecons are payable  quarterly at an annual rate of 5.375%
by AES Trust I and 5.5% for AES Trust II. The Trusts are each permitted to defer
payment of dividends for up to 20  consecutive  quarters,  provided that AES has
exercised its right to defer interest  payments under the  corresponding  Junior
Debentures.   During  such  deferral  periods,  dividends  on  the  Tecons  will
accumulate  quarterly  and  accrue  interest  and  AES may  not  declare  or pay
dividends on its common stock.  The Tecons are convertible into the common stock
of AES at each  holder's  option  prior to March  31,  2027 for AES  Trust I and
September  30,  2012 for AES  Trust II at the rate of 1.3812  and .8914  shares,
respectively,  representing a conversion  price  equivalent to $36.20 and $56.09
per share respectively.

     AES, at its option,  can redeem the 5.375%  Debentures after March 31, 2000
which would result in the required  redemption of the Tecons issued by AES Trust
I, for  $51.68  per Tecon,  reduced  annually  by $0.336 to a minimum of $50 per
Tecon and can redeem the 5.5%  Debentures  after  September 30, 2000 which would
result in the  required  redemption  of the  Tecons  issued by AES Trust II, for
$51.72 per Tecon, reduced annually by $0.344 to a minimum of $50 per Tecon.

    Interest expense for the year ended December 31, 1998 and 1997 includes $ 14
million and $10 million,  respectively  related to the dividends  accrued on the
Tecons of AES Trust I and $17  million  and $3 million  related to AES Trust II,
respectively.

8. STOCKHOLDERS' EQUITY
SALE OF STOCK -- In August 1998,  the Company sold 4.3 million  shares of common
stock at $44.625 per share. Net proceeds from the offering were $184 million.

     STOCK SPLIT AND STOCK  DIVIDEND -- 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  August  28,  1997.  Accordingly,  all
outstanding share, per share and stock option data in all periods presented have
been restated to reflect the split.

     STOCK   CONVERSION  --  On  July  30,  1996,  $49  million  of  convertible
debentures,  net of conversion  costs, were converted into 3.8 million shares of
AES common stock at a conversion price of $13.08 per share.

     STOCK  OPTIONS AND WARRANTS -- The Company has granted  options to purchase
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, 1998,  there were  approximately  3.4 million  shares  reserved for
future grants under the plans.
<TABLE>
<CAPTION>
A summary of the option activity follows (in thousands of shares):
========================================================================================================================
FOR THE YEARS ENDED DECEMBER 31             1998                          1997                          1996
========================================================================================================================
                                            WEIGHTED-AVERAGE             WEIGHTED-AVERAGE               WEIGHTED-AVERAGE
                                     SHARES  EXERCISE PRICE        SHARES EXERCISE PRICE         SHARES  EXERCISE PRICE
------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>               <C>        <C>                <C>        <C>   
Outstanding - beginning of year      8,896       $13.29            8,020      $ 9.30             8,126      $ 7.28
Exercised during the year           (1,043)        8.60             (941)       7.78              (960)       5.35
Forfeitures during the year            (10)       31.99              (58)      11.23              (432)      10.28
Granted during the year                 83(1)     34.36              999       34.42             1,286       19.39
Conversion of Chigen options            --           --              876       19.67                --          --
------------------------------------------------------------------------------------------------------------------------
Outstanding - end of year            7,926       $14.10            8,896      $13.29             8,020      $ 9.30
========================================================================================================================
Eligible for exercise - end of year  6,855       $12.54            6,163     $  9.37             4,264      $ 6.43
========================================================================================================================
</TABLE>

(1) Additional stock options for 1998 performance were granted in February 1999.
    The Company issued approximately one million options to purchase shares at a
    price of $34.25 per share.

The following table summarizes  information  about stock options  outstanding at
December 31, 1998 (in thousands of shares):
<TABLE>
<CAPTION>
==================================================================================================================
                                            OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
==================================================================================================================
                                              WEIGHTED-AVERAGE    WEIGHTED-                           WEIGHTED-
  RANGE OF                            TOTAL    REMAINING LIFE      AVERAGE              TOTAL          AVERAGE
EXERCISE PRICES                   OUTSTANDING    (IN YEARS)    EXERCISE PRICE         EXERCISABLE  EXERCISE PRICE
-----------------------------------------------------------------------------------------------------------------
<S>                                <C>              <C>          <C>                   <C>           <C>    
$.78   - $3.24                      1,400            1.8          $  2.97               1,400         $  2.97
$3.25  - $9.88                      1,849            5.1             8.88               1,475            8.76
$9.89  - $14.40                     2,045            6.3            10.42               2,029           10.42
$14.41 - $22.85                     1,540            7.3            20.11               1,408           20.30
$22.86 - $58.00                     1,092            8.3            35.65                 543           35.22
-----------------------------------------------------------------------------------------------------------------
TOTAL                               7,926                         $ 14.10               6,855         $ 12.54
-----------------------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>

     The Company accounts for its stock-based  compensation  plans under APB No.
25, and has adopted SFAS No. 123, Accounting For Stock-Based  Compensation,  for
disclosure  purposes.  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.  For SFAS No. 123  disclosure  purposes,  the
weighted  average 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:

==================================================
                                1998   1997  1996
==================================================

Interest rate (risk-free)       4.7%  5.9%  6.5%
Volatility                       47%   37%   28%
==================================================

     Using these assumptions,  an expected option life of 7 years and a dividend
yield of zero, the weighted  average fair value of each stock option granted was
$19.02,  $17.86 and $8.81, for the years ended December 31, 1998, 1997 and 1996,
respectively.

    Had  compensation  expense been determined  under the provisions of SFAS No.
123,  utilizing  the  assumptions  detailed  in  the  preceding  paragraph,  the
Company's  net income and  earnings  per share for the years ended  December 31,
1998,  1997 and 1996 would have been reduced to the  following pro forma amounts
(in millions):
<TABLE>
<CAPTION>

================================================================================
FOR THE YEARS ENDED DECEMBER 31                        1998     1997     1996
================================================================================
NET INCOME:
<S>                                                    <C>      <C>       <C>  
As reported                                            $ 311    $185      $ 125
Pro forma                                                301     174        123
BASIC EARNINGS PER SHARE:
As Reported                                            $1.75    $1.11     $0.83
Pro forma                                               1.70     1.04      0.81
DILUTED EARNINGS PER SHARE:
As reported                                            $1.69    $1.09     $0.80
Pro forma                                               1.64     1.00      0.78
================================================================================
</TABLE>

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

     In  addition  to the  options,  the  Company  has  outstanding  warrants to
purchase  up to 1.3  million  shares of its  common  stock at  $14.72  per share
through July 2000.

     CHIGEN -- In May 1997, the Company acquired all of the outstanding  Class A
shares of Chigen by  amalgamating  Chigen with a wholly-owned  subsidiary of the
Company.  As a result of this  transaction,  the Company issued  approximately 5
million  shares of its common stock.  As part of the  amalgamation,  the Company
also  converted the  outstanding  options of the Chigen stock option plan to AES
stock options at the ratio of .29 to 1.

9. EARNINGS PER SHARE
The following table presents a reconciliation of the numerators and denominators
of the basic and  diluted  earnings  per share  computations  for income  before
extraordinary  item.  In the table below Income  represents  the  numerator  (in
millions) and Shares represent the denominator (in thousands):
<TABLE>
<CAPTION>
=======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31              1998                            1997                         1996
=======================================================================================================================
                                                      $ PER                         $ PER                       $ PER
                                      INCOME SHARES   SHARE         INCOME  SHARES  SHARE         INCOME SHARES SHARE
-----------------------------------------------------------------------------------------------------------------------
BASIC EPS
<S>                                    <C>    <C>     <C>            <C>     <C>    <C>            <C>    <C>   <C>  
Income before extraordinary item       $307   177.5   $1.73          $188    166.6  $1.13          $125   151.5 $0.83
EFFECT OF DILUTIVE SECURITIES
Stock options and warrants               --     4.3                    --      4.4                   --     2.7
Stock units allocated to deferred
  compensation plans                     --     0.3                    --      0.5                   --     0.5
Tecons and other convertible debt,
  net of tax                              9     6.9                    10      6.3                    1     2.5
-----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE             $316   189.0   $1.67          $198    177.8  $1.11          $126   157.2 $0.80
=======================================================================================================================
</TABLE>


<PAGE>

10. INCOME TAXES

INCOME TAX PROVISION -- The provision for income taxes consists of the following
(in millions):
<TABLE>
<CAPTION>
================================================================================
FOR THE YEARS ENDED DECEMBER 31        1998              1997            1996
================================================================================
<S>                                   <C>               <C>              <C> 
Federal
  Current                             $  (9)            $   7            $ 19
  Deferred                               61                22              27
State
  Current                                 3                19              12
  Deferred                               (5)               (6)             (2)
Foreign
  Current                                82                18              10
  Deferred                               13                17               8
--------------------------------------------------------------------------------
Total                                 $ 145              $ 77            $ 74
================================================================================
</TABLE>

    The  Company  records its share of  earnings  of its equity  investees  on a
pre-tax basis. The Company's share of the investee's income taxes is recorded in
income tax expense; amounts for prior years have been reclassified as such.

    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 (after minority interest) is as follows:
<TABLE>
<CAPTION>
================================================================================
For the Years Ended December 31       1998              1997            1996
================================================================================

<S>                                     <C>               <C>             <C>
Statutory Federal tax rate              35%               35%             35%
Change in valuation allowance           --                (1)             (1)
State taxes, net of Federal tax benefit (1)                3               3
Taxes on foreign earnings               (1)               (7)             --
Other - net                             (1)               (1)             --
--------------------------------------------------------------------------------
Effective tax rate                      32%               29%             37%
================================================================================
</TABLE>


     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 in different  periods than
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.

    As of  December  31,  1998,  the Company  had  Federal  net  operating  loss
carryforwards  for tax purposes of approximately  $85 million expiring from 2008
through 2018,  Federal  investment tax credit  carryforwards for tax purposes of
approximately  $51 million  expiring  in years 2002  through  2006,  and Federal
alternative  minimum tax credits of approximately $44 million which carryforward
without  expiration.  As of  December  31,  1998,  the  Company  had foreign net
operating  loss  carryforwards  of  approximately  $100 million  which expire at
various  times  beginning  in  2001,  and  some of  which  carryforward  without
expiration.  The  Company  had  state net  operating  loss  carryforwards  as of
December 31, 1998 of  approximately  $215 million expiring in years 1999 through
2018, and state tax credit  carryforwards of approximately  $11 million expiring
in years 2001 through  2008.  

     The valuation  allowance increased by $2 million during 1998 to $33 million
at December 31,  1998.  This  increase  was the result of increased  foreign net
operating loss  carryforwards,  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>

Deferred tax assets and liabilities are as follows (in millions):
<TABLE>
<CAPTION>
================================================================================
FOR THE YEARS ENDED DECEMBER 31                      1998               1997
================================================================================
<S>                                                  <C>                <C>  
Differences between book and tax basis of
  property and total deferred tax liability          $ 469              $ 476
--------------------------------------------------------------------------------
Operating loss carryforwards                           (69)               (75)
Bad debt and other book provisions                     (48)               (47)
Retirement costs                                       (26)               (31)
Tax credit carryforwards                              (107)              (104)
Other deductible temporary differences                 (55)               (24)
--------------------------------------------------------------------------------
Total gross deferred tax asset                        (305)              (281)
Less: valuation allowance                               33                 31
--------------------------------------------------------------------------------
Total net deferred tax asset                          (272)              (250)
--------------------------------------------------------------------------------
Net deferred tax liability                           $ 197              $ 226
================================================================================
</TABLE>

     Undistributed  earnings  of  certain  foreign  affiliates  aggregated  $257
million on  December  31,  1998.  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 such  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.  A
deferred tax asset of $35 million has been  recorded as of December 31, 1998 for
the cumulative effects of certain foreign currency translation losses.

    Income from  continuing  operations  before  income taxes and  extraordinary
items consisted of the following:
<TABLE>
<CAPTION>
================================================================================
FOR THE YEARS ENDED DECEMBER 31             1998           1997           1996
================================================================================
<S>                                        <C>         <C>            <C> 
United States                               $211           $199           $175
Foreign                                      241             66             24
--------------------------------------------------------------------------------
Total                                       $452           $265           $199
================================================================================
</TABLE>


<PAGE>

11. PROFIT SHARING AND DEFERRED 
    COMPENSATION PLANS

PROFIT  SHARING AND STOCK  OWNERSHIP  PLANS -- The Company  sponsors  two profit
sharing and stock ownership  plans,  qualified under section 401 of the Internal
Revenue Code, which are available to eligible AES people.  The plans provide 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 plans were  approximately  $5 million  for the years ended
December 31, 1998 and 1997 and $4 million for the year ended December 31, 1996.

     DEFERRED COMPENSATION PLANS -- The Company sponsors 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 change of control of the Company (as defined
in the plan document).

     In  addition,   the  Company  sponsors  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  plans.  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 contributions 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.

     The Company also sponsors a supplemental  retirement plan covering  certain
highly-compensated  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.

     DEFINED BENEFIT PLANS -- Two of the Company's subsidiaries,  Sul and Clesa,
have  defined  benefit  pension  plans  covering   substantially  all  of  their
respective  employees.  Pension benefits are based on years of credited service,
age of the participant and average earnings.  Sul's plan assets are comprised of
Brazilian government  securities and bonds, stocks of publicly-traded  Brazilian
companies and real estate holdings. Clesa's pension plan is unfunded.


<PAGE>

Significant   assumptions  used  in  the  calculation  of  pension  expense  and
obligation are as follows:

<TABLE>
<CAPTION>
================================================================================
                                                          1998          1997(1)
                                                       Sul   Clesa
================================================================================
<S>                                                     <C>    <C>        <C>
Discount rate                                           6%     11%        6%
Rate of compensation increase                           2%      7%        2%
Long-term rate of return on plan assets                 6%      --        6%
================================================================================
</TABLE>

     Net benefit  cost for the year ended  December  31, 1998 and the two months
ended December 31, 1997 (subsequent to the date of the Sul acquisition) includes
the following components (in millions):

<TABLE>
<CAPTION>
================================================================================
December 31                                           1998              1997(1)
================================================================================
<S>                                                    <C>              <C> 
Service cost                                           $ 2              $ .3
Interest cost on projected benefit obligation            3                .1
Expected return on plan assets                          (1)               .3
Recognized actuarial gain                               --                .1
--------------------------------------------------------------------------------
Net benefit cost                                       $ 4              $ .8
================================================================================
</TABLE>

The changes in the benefit  obligations  of the two plans combined for the years
ended December 31, 1998 and 1997 are as follows (in millions):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                      1998              1997(1)
--------------------------------------------------------------------------------
<S>                                                   <C>               <C>
CHANGES IN BENEFIT OBLIGATIONS:
Benefit obligation at beginning of year               $ 72               $--
Effect of foreign currency exchange rate change
   on beginning balance                                 (5)               --
Service cost                                             2                --
Interest cost                                            3                --
Plan participant contributions                          --                 1
Actuarial loss/(gain)                                    6                (2)
Acquisition                                              3                73
Benefits paid                                           (1)               --
--------------------------------------------------------------------------------
Benefit obligation as of December 31                  $ 80              $ 72
================================================================================
</TABLE>

The  changes in the plan  assets of the two plans  combined  for the years ended
December 31, 1998 and 1997 are as follows (in millions):
<TABLE>
<CAPTION>
================================================================================
                                                              1998     1997(1)
================================================================================
CHANGES IN PLAN ASSETS:
<S>                                                         <C>      <C>
Fair value of plan assets at beginning of year              $ 31     $--
Effect of foreign currency exchange rate change
   on beginning balance                                       (2)     --
Actual return on plan assets                                   3       1
Acquisition                                                   --      28
Employer contribution                                          2       1
Plan participant contributions                                --       1
Benefits paid                                                 (1)     --
--------------------------------------------------------------------------------
Fair value of plan assets as of December 31                   33      31
================================================================================
</TABLE>

The funded  status of the two plans  combined for the years ended as of December
31, 1998 and 1997 are as follows (in millions):
<TABLE>
<CAPTION>
================================================================================
                                                               1998     1997(1)
================================================================================
<S>                                                             <C>      <C> 
Funded status                                                   (47)     (41)
Unrecognized net actuarial loss/(gain)                            5       (3)
--------------------------------------------------------------------------------
Accrued benefit obligation cost as of December 31             $ (42)   $ (44)
================================================================================
</TABLE>
(1) Sul only, as Clesa was acquired during 1998 (see Note 2).

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


<PAGE>

12. SEGMENTS
The Company considers its reportable segments to be generation and distribution.
Information  about the Company's  operations and assets by segment is as follows
(in millions):
<TABLE>
<CAPTION>
========================================================================================================================
                                                                          PRE-TAX              INVESTMENT IN
                                           DEPRECIATION    OPERATING    EQUITY IN      TOTAL   AND ADVANCES  PROPERTY
                              REVENUES(1) AND AMORTIZATION    INCOME      EARNINGS     ASSETS  TO AFFILIATES  ADDITIONS
========================================================================================================================
<S>                             <C>           <C>           <C>            <C>        <C>        <C>         <C>   
Year Ended December 31, 1998
Generation                      $1,443        $  126        $  563         $  33      $ 5,682    $  495      $  369
Distribution                       939            70           218           199        4,687     1,438         148
Corporate and services              16            --           (48)           --          412        --          --
-----------------------------------------------------------------------------------------------------------------------
TOTAL                           $2,398        $  196        $  733        $  232      $10,781    $1,933      $  517
========================================================================================================================
YEAR ENDED DECEMBER 31, 1997
Generation                      $1,081         $  93        $  380         $  21      $ 4,404    $  315      $  483
Distribution                       280            21            24           105        4,269     1,548          28
Corporate and services              50            --           (36)           --          236        --          --
------------------------------------------------------------------------------------------------------------------------
TOTAL                           $1,411        $  114        $  368        $  126      $ 8,909    $1,863      $  511
========================================================================================================================
YEAR ENDED DECEMBER 31, 1996
Generation                      $  824         $  65        $  309         $  21      $ 3,002    $   82      $  506
Distribution                        --            --            --            28          433       409          --
Corporate and services              11            --           (31)           --          187        --          --
------------------------------------------------------------------------------------------------------------------------
TOTAL                           $  835         $  65        $  278         $  49      $ 3,622    $  491      $  506
========================================================================================================================
</TABLE>

(1) Intersegment  revenues  for the years ended  December 31, 1998 and 1997 were
    $69 million and $34 million, respectively.

Information about the Company's  operations and long-lived assets by country are
as follows (in millions):
<TABLE>
<CAPTION>
========================================================================================================================
                           US       ARGENTINA    BRAZIL      HUNGARY    PAKISTAN      OTHER   TOTAL FOREIGN    TOTAL
========================================================================================================================
<S>                      <C>          <C>         <C>         <C>         <C>         <C>        <C>         <C>   
REVENUES
1998                     $  655       $423        $478        $227        $213        $402       $1,743      $2,398
1997                        577        291          74         220          23         226          834       1,411
1996                        554        146          --          85          --          50          281         835
========================================================================================================================
LONG-LIVED ASSETS
1998                     $2,329     $1,017        $848        $154        $505        $980       $3,504      $5,833
1997                      1,424        587         875         172         490         726        2,850       4,274
1996                      1,281        203           6         202         393         182          986       2,267
========================================================================================================================
</TABLE>


<PAGE>

13. 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 financial liabilities,
and debt service reserves and other deposits, are estimated to be equal to their
reported carrying amounts.  The fair value of project financing debt,  excluding
capital  leases,  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. The fair value of interest
rate swap, cap and floor agreements is the estimated net amount that the Company
would  pay to  terminate  the  agreements  as of the  balance  sheet  date.  The
estimated fair values of the tax exempt bonds and Chigen bonds (both included in
project financing debt), certain of the other notes payable and Tecons are based
on quoted market prices.

The  estimated  fair  values  of the  Company's  debt and  derivative  financial
instruments as of December 31, 1998 and 1997 are as follows (in millions):
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31                             1998                         1997
                                CARRYING       FAIR         CARRYING       FAIR
                                  AMOUNT       VALUE         AMOUNT        VALUE
================================================================================
<S>                                 <C>       <C>            <C>          <C>   
Project financing debt              $4,867    $4,847         $3,942       $3,953
Other notes payable                  1,652     1,687          1,096        1,116
Tecons                                 550       657            550          661
Interest rate swaps                     --       101             --           81
Interest rate caps and floors, net      --        (5)            --           --
================================================================================
</TABLE>

The fair value estimates presented herein are based on pertinent  information as
of  December  31, 1998 and 1997.  The  Company is not aware of any factors  that
would  significantly  affect the estimated fair value amounts since December 31,
1998.

14. NEW ACCOUNTING PRONOUNCEMENTS

     In April 1998,  the  American  Institute of  Certified  Public  Accountants
(AICPA)  issued  Statement  of Position  (SOP) 98-5,  Reporting  on the Costs of
Start-Up  Activities.  SOP 98-5 provides guidance on the financial  reporting of
start-up and  organization  costs. The effect of adopting this Statement in 1999
is not expected to be material to the Company.

     In June 1998, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.  SFAS No.
133  established  standards  for the  accounting  and  reporting  of  derivative
instruments  and hedging  activities  and will be adopted by the Company  during
fiscal year 2000. The Company is currently evaluating the impact of the adoption
of SFAS No. 133.


<PAGE>

15.  QUARTERLY DATA (UNAUDITED)
The following table summarizes the unaudited quarterly  statements of operations
(in millions, except per share amounts):
<TABLE>
<CAPTION>
=======================================================================================================================
QUARTERS ENDED 1998                               MAR 31                 JUN 30               SEP 30           DEC 31
=======================================================================================================================
<S>                                                <C>                    <C>                  <C>              <C>  
Sales and services                                 $ 575                  $ 565                $ 612            $ 646
Gross margin                                         178                    180                  212              241
Income before extraordinary item                      65                     71                   79               92
Extraordinary item, net of taxes                      --                     --                    2                2
Net income                                            65                     71                   81               94
Basic earnings per share:
  Before extraordinary item                        $0.37                  $0.41                $0.44            $0.51
  Extraordinary item                                  --                     --                 0.01             0.01
Basic earnings per share                           $0.37                  $0.41                $0.45            $0.52
Diluted earnings per share:
   Before extraordinary item                       $0.37                  $0.39                $0.43            $0.49
   Extraordinary item                                 --                     --                 0.01             0.01
Diluted earnings per share                         $0.37                  $0.39                $0.44            $0.50
=======================================================================================================================
QUARTERS ENDED 1997                               MAR 31                 JUN 30               SEP 30           DEC 31
=======================================================================================================================
Sales and services                                 $ 261                  $ 261                $ 358            $ 531
Gross margin                                          94                     98                  112              126
Income before extraordinary item                      40                     42                   50               56
Extraordinary item, net of tax benefit                --                     --                   (3)              --

Net income                                            40                     42                   47               56
Basic earnings per share:
  Before extraordinary item                        $0.26                  $0.26                $0.29            $0.32
  Extraordinary item                                  --                     --                (0.02)              --
Basic earnings per share                           $0.26                  $0.26                $0.27            $0.32
Diluted earnings per share:
   Before extraordinary item                       $0.25                  $0.25                $0.28            $0.32
   Extraordinary item                                 --                     --                (0.02)              --
Diluted earnings per share                         $0.25                  $0.25                $0.26            $0.32
=======================================================================================================================
</TABLE>


<PAGE>



                                   SIGNATURES

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


                                                  THE AES CORPORATION

                                                  By: /s/ William R. Luraschi
                                                     ------------------------
                                                     Name: William R. Luraschi
                                                     Title: Vice President and
                                                             General Counsel


Date: March 18, 1999


<PAGE>


EXHIBIT INDEX

EX-23 INDEPENDENT AUDITORS' CONSENT
EX-27 FDS
[{"type": "8-K", "sequence": "1", "description": "FORM 8-K", "secsgml_size_bytes": 185712}]
{"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": "99568146"}, "business-address": {"street1": "1001 N 19TH ST", "street2": "STE 2000", "city": "ARLINGTON", "state": "VA", "zip": "22209", "phone": "7035221315"}}
================================================================================

                UNITED STATES 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) March 18, 1999

                               THE AES CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)

       DELAWARE                       0-19281                    54-1163725     
(State of incorporation       (Commission File Number)         (IRS Employer    
    or organization)                                         Identification No.)

                             1001 NORTH 19TH STREET
                               ARLINGTON, VA 22209
    (Address, including zip code of Registrant's principal Executive Offices)

       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  Discussion  and Analysis of
Financial  Condition and Results of  Operations  filed under Item 5 and the 1998
consolidated financial statements of The AES Corporation filed under Item 7.
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION  

     The  AES  Corporation  (AES  or the  Company)  is a  global  power  company
committed to serving the world's needs for electricity in a socially responsible
way.  Electricity  sales accounted for 97% of total revenues during 1998 and 94%
during  1997.  Other  sales  arise from the sale of steam and other  commodities
related to the Company's  cogeneration  operations.  Service revenues  represent
fees earned in  connection  with  wholesale  power  services,  and operating and
construction services provided by AES to its affiliates.

     The majority of the Company's  revenues  represent  sales of electricity to
customers  (generally  electric  utilities or regional  electric  companies) for
further resale to end users. This is referred to as the electricity "generation"
business.  AES's generation business  represented 58% of total revenues for 1998
compared to 74% for 1997. Sales by these  generation  companies are usually made
under long-term contracts from power plants owned by the Company's  subsidiaries
and affiliates,  although in certain instances,  the Company sells directly into
regional wholesale electricity markets without a contract.  The Company owns new
plants constructed for such purposes  ("greenfield"  plants) as well as existing
power plants acquired through  competitively  bid  privatization  initiatives or
negotiated acquisitions.

     In its generation business, AES now operates and owns (entirely or in part)
a diverse  portfolio  of  electric  power  plants  (including  those  within the
integrated  distribution  companies  discussed  below) with a total  capacity of
24,076  megawatts (MW). Of that total, 29% are fueled by coal or petroleum coke,
24% are fueled by natural gas, 33% are hydroelectric  facilities,  6% are fueled
by oil, and the remaining 8% are capable of using multiple  fossil fuels. Of the
total MW,  5,025  (nine  plants) are  located in the United  States,  817 (eight
plants) are in China,  1,281  (three  plants) are in Hungary,  6,456  (forty-one
plants) are in Brazil,  1,818 (five  plants) are in the UK, 885 (six plants) are
in  Argentina,  5,384  (seven  plants)  are in  Kazakhstan  (including  4,000 MW
attributable  to  Ekibastuz   which   currently  has  a  reliable   capacity  of
approximately  25%),  210 (one plant) are in the  Dominican  Republic,  110 (one
plant) are in Canada,  695 (two plants) are in Pakistan,  405 (one plant) are in
the Netherlands,  288 (one plant) are in Australia, 420 (one plant) are in India
(operational  control in 1999) and 282 (three plants) are in Panama (acquired in
1999).

     AES is also  currently in the process of adding  approximately  5,254 MW to
its operating portfolio by constructing  several new plants. These include a 180
MW coal-fired plant and a 700 MW natural gas-fired plant in the United States, a
600 MW natural  gas-fired plant in Brazil, a 2,100 MW coal-fired plant in China,
an 830 MW natural  gas-fired  plant in Argentina,  a 360 MW coal-fired  plant in
England and a 484 MW natural gas-fired plant in Mexico.

     As a result,  AES's total MW of the 96 power  plants in  operation or under
construction  is  approximately  29,330 MW and net  equity  ownership  (total MW
adjusted for the Company's ownership percentage) represents approximately 19,819
MW.

     Because  of the  significant  complexities  associated  with  building  new
electric  generating plants,  construction  periods often range from two to five
years,  depending on the  technology  and location.  AES currently  expects that
projects now under  construction  will reach  commercial  operation and begin to
sell  electricity at various dates through the year 2002. The completion of each
plant in a timely manner is generally  supported by a guarantee from the plant's
construction contractor,  although in certain cases, AES has assumed the risk of
satisfactory  construction  completion.  However,  it remains  possible,  due to
changes in the  economic,  political,  technological,  regulatory  or logistical
circumstances involving each individual plant, that commercial operations may be
delayed in certain cases.

     AES also  sells  electricity  directly  to end  users  such as  commercial,
industrial,  governmental and residential customers.  This is referred to as the
electricity "distribution" business. AES's distribution business represented 39%
of total revenues for 1998 compared to 20% for 1997.  Electricity sales by AES's
distribution  businesses  are  generally  made  pursuant  to the  provisions  of
long-term  electricity sale concessions granted by the appropriate  governmental
authority as part of the original privatization of
each distribution  company.  In certain cases, these distribution  companies are
"integrated",  in that they also own  electric  power  plants for the purpose of
generating a portion of the  electricity  they sell. Each  distribution  company
also purchases,  in varying proportions,  electricity from third party wholesale
suppliers, including in certain cases, other subsidiaries of the Company.

     AES has majority  ownership in three  distribution  companies in Argentina,
one in  Brazil  and one in El  Salvador,  a heat  and  electricity  distribution
business in Kazakhstan,  one in the Republic of Georgia  (operational control in
1999),  and  less  than  majority  ownership  in three  additional  distribution
companies in Brazil.  These ten companies  serve a total of  approximately  13.2
million  customers with sales  exceeding  63,000 gigawatt hours. On a net equity
basis,  AES's ownership  represents  approximately 3 million customers and sales
exceeding 22,000 gigawatt hours.

     AES  continues  to  believe  that  there  is  significant  demand  for more
efficiently operated electricity  generation and distribution  businesses.  As a
result, and guided by its commitment to serve the world's needs for electricity,
AES is pursuing additional  greenfield  development projects and acquisitions in
many countries.  Several of these, if consummated,  would require the Company to
obtain  substantial  additional  financing,   including  both  debt  and  equity
financing.

     AES is also  currently in the process of completing  several  acquisitions,
including its agreement to acquire six  coal-fired  generating  plants  totaling
approximately 1,400 MW from NGE Generation, Inc., an affiliate of New York State
Electric  and Gas  Corporation,  and its  agreement  to acquire the  outstanding
shares of Cilcorp, Inc. an integrated distribution company in Illinois.

     Certain  subsidiaries and affiliates of the Company (domestic and non-U.S.)
have signed  long-term  contracts or made similar  arrangements  for the sale of
electricity and are in various stages of developing the related greenfield power
plants. There exist substantial risks to their successful completion, including,
but  not  limited  to,  those   relating  to  failures  of  siting,   financing,
construction,  permitting,  governmental  approvals or  termination of the power
sales  contract  as a result  of a failure  to meet  certain  milestones.  As of
December 31, 1998, capitalized costs for projects under development and in early
stage construction were  approximately  $144 million.  The Company believes that
these costs are recoverable;  however, no assurance can be given that changes in
circumstances related to individual projects will not occur or that any of these
projects will be completed and reach commercial operation.

     AES has been  successful  in growing its  business  and serving  additional
customers  by   participating   in  competitive   bidding  under   privatization
initiatives  and other  asset  sales  and has been  particularly  interested  in
acquiring  existing  businesses  or  assets  in  electricity  markets  that  are
promoting  competition  and  eliminating  rate  of  return  regulation.  In such
privatizations,  sellers generally seek to complete competitive solicitations in
less  than  one  year,  much  quicker  than  the time  periods  associated  with
greenfield  development  and  construction,  and  require  payment  in  full  on
transfer.  AES  believes  that its  experience  in  competitive  markets and its
worldwide  integrated group structure (with its significant  geographic coverage
and presence) enable it to react quickly and creatively in such situations.

     Because of this relatively  quick process or other  considerations,  it may
not  always  be  possible  to  arrange   "project   financing"   (the  Company's
historically  preferred  financing  method,  which is  discussed  further  under
"Capital   Resources,   Liquidity  and  Market  Risk")  for  specific  potential
acquisitions.  Additionally,  as  in  the  past,  certain  acquisitions  or  the
commencement   of  construction  on  several   greenfield   developments   would
potentially  require  the  Company to obtain  substantial  additional  financing
including  both  debt and  equity.  As a  result,  and in order to  enhance  its
financial capabilities to respond to these more accelerated  opportunities,  the
Company  maintains a $600 million  revolving line and letter of credit  facility
(the Revolver).  AES also maintains a "universal shelf"  registration  statement
with the SEC which allows for the public issuance of various additional debt and
preferred or common equity  securities,  either  individually or in combination,
and which currently  represents  approximately  $900 million in unused potential
proceeds from the issuance of public securities.
RESULTS OF OPERATIONS

REVENUES.  Total  revenues  increased  $987 million (70%) to $2,398 million from
1997 to 1998 after  increasing $576 million (69%) to $1,411 million from 1996 to
1997.  The increase in 1998  primarily  reflects the  acquisition of controlling
interests in two distribution  companies,  Clesa and Edelap,  three  electricity
generating  plants at Southland,  a full year of operations at Eden,  Edes, Sul,
Los Mina,  Altai and Lal Pir, and the  commencement of commercial  operations at
Pak  Gen,  Barry,  Hefei,  and  Jiaozou,  offset  in part by lower  revenues  at
Ekibastuz.   The  increase  in  1997  primarily   reflects  the  acquisition  of
controlling  interests in the  distribution  companies  Eden,  Edes, and Sul and
electricity  generating  plants at Altai and Los Mina, a full year of operations
at Tisza and Ekibastuz,  service revenue  associated with construction at Elsta,
and the start of commercial operations at Lal Pir.

     The nature of most of the Company's generating businesses is such that each
power plant generally  relies on one power sales contract with a single electric
customer for the majority, if not all, of its revenues. The prolonged failure of
any significant  customer to fulfill its contractual  payment obligations in the
future could have a substantial  negative impact on AES's results of operations.
The Company has sought to reduce this risk,  where  possible,  by entering  into
power sales contracts with customers who have their debt or preferred securities
rated "investment grade", or by obtaining sovereign government guarantees of the
purchaser's  obligations,  as  well  as by  locating  its  plants  in  different
geographic  areas  in  order  to  mitigate  the  effects  of  regional  economic
downturns.

     However,  AES does not limit  its  business  solely  to the most  developed
countries  or  economies,  nor only to those  countries  with  investment  grade
sovereign  credit  ratings.  In  certain  locations,   particularly   developing
countries or countries that are in a transition from centrally planned to market
oriented economies,  the electricity purchasers,  both wholesale and retail, may
experience  difficulty  in  meeting  contractual  payment  obligations.  AES has
recorded  a  provision  for  uncollectible  amounts  of  $22  million  for  1998
associated  with  receivables  arising  from  the  Company's  operations  in the
Dominican Republic and Kazakhstan,  and $17 million and $20 million for 1997 and
1996,  respectively,  associated  with  receivables  arising from the  Company's
operations   in   Kazakhstan.   There  can  be  no  assurance  of  the  ultimate
collectibility of these amounts owed to the Company.

     A portion,  and in certain cases all, of the electricity sales from several
plants is not subject to a contract and is available for sale, when economically
advantageous,  in the  relevant  spot  electricity  market.  The prices paid for
electricity  in the  spot  markets  may be  volatile  and are  dependent  on the
behavior of the local  economy,  including  the demand for, and retail price of,
electricity  and the  competitive  price and  availability  of power  from other
suppliers.

     Electricity  sales by AES's  distribution  businesses  are made pursuant to
provisions  of long-term  electricity  sales  concession  agreements  ranging in
remaining length from 18 to 93 years.  Each business is generally  authorized to
charge its  customers  a tariff for  electric  services  which  consists  of two
components:  an energy  expense  pass-through  component  and an operating  cost
component.  Both components are established as part of the original grant of the
concession  for  certain  initial  periods  (ranging  from  four to eight  years
remaining).  Beginning  subsequent  to  the  initial  periods,  and  at  regular
intervals  thereafter,  the  concession  grantor has the authority to review the
costs of the relevant  business to determine the inflation  adjustment (or other
similar  adjustment  factor),  if any,  to the  operating  cost  component  (the
"Adjustment  Escalator") for the subsequent  regular  interval.  This review can
result in an Adjustment  Escalator that has a positive,  zero or negative value.
To date,  the Company has not reached the end of the initial  tariff  periods in
any of its distribution businesses. As a result, there can be no assurance as to
the effects, if any, on its future results of operations of potential changes to
the Adjustment Escalator.

     As stated above, the electricity  sales  concessions  provide for an annual
adjustment  to the tariff,  resulting in  adjustments  based on several  factors
including  inflation  increases as measured by different agreed upon indices. In
certain  situations,  there is also an
explicit  adjustment  to a portion of the tariff that reflects  changes,  either
entirely or in part, in exchange  rates between the local  currency and the U.S.
Dollar.  Such adjustments are made in arrears at various regular intervals,  and
in certain cases, requests for interim adjustments are permitted.

     However,  if the relevant  foreign  currency were to experience a sudden or
severe  devaluation  relative  to  the  U.S.  Dollar  (the  Company's  reporting
currency),  such as occurred to the Brazilian  Real in January 1999,  because of
the in arrears nature of the  respective  adjustment in the tariff or because of
the potential  delays or magnitude of the resulting local currency  inflation of
the tariff, the future results of operations of AES's distribution  companies in
that country could be adversely affected.  Depending on the duration or severity
of such  devaluation,  the  future  results  of  operations  of AES may  also be
adversely affected.

     In Brazil,  AES has interests in four distribution  companies or integrated
utilities  (the  Brazilian   Businesses).   These  distribution  companies  have
long-term   concession   agreements  which,   although  varying  in  term,  have
substantially  similar clauses providing for tariff adjustments based on certain
specific events or circumstances. These adjustments occur annually (at different
times) for each  Brazilian  Business and, in certain  instances,  in response to
specific  requests for  adjustment.  Adjustments  to the tariff rates during the
annual  proceedings are designed to reflect,  among others, (i) increases in the
inflation rate as represented by a Brazilian  inflation  index (IGPM),  and (ii)
increases in specified  operating costs  (including  purchased power costs),  in
each case as measured  over the preceding  twelve  months.  The specific  tariff
adjustment  mechanism  provides  each  Brazilian  Business the option to request
additional  rate  adjustments  arising from unusual or significant  events which
disrupt the economic and financial equilibrium of such business. Such events may
include  significant  increases in purchased power costs or local inflation,  or
significant currency  devaluation.  The Brazilian Business requesting relief has
the  burden  to prove the  impact  on its  financial  or  economic  equilibrium,
however, there can be no assurance that such adjustments will be granted.

     During early 1999, the Brazilian Real experienced a significant devaluation
relative to the U.S.  Dollar,  declining from 1.21 Brazilian Reais to the Dollar
at  December  31,  1998 to 1.79 Reais to the Dollar at  February  3, 1999.  As a
result, there will likely be a negative and potentially material impact on AES's
results of operations because of the effect of this and any further  devaluation
on the operating results of the Brazilian  Businesses.  Each Brazilian  Business
has or intends to recover the  specific  rate  adjustments  as  discussed in the
preceding  paragraphs;  however, the resulting effects of the devaluation on the
local Brazilian  inflation rate and the certainty,  timing, and amounts of these
rate  increases at each  business,  and  therefore,  the future  impact on AES's
earnings cannot be predicted. See also "Capital Resources,  Liquidity and Market
Risks" for additional  effects  associated with the devaluation of the Brazilian
Real. 

COSTS OF SALES AND SERVICES.  Total costs of sales and services  increased  $606
million (62%) to $1,587 million in 1998 after  increasing  $479 million (95%) to
$981 million in 1997. The increase in 1998 was primarily  caused by the costs of
electricity  sales  associated with the acquisition of controlling  interests in
two  distribution  companies,  Clesa and Edelap,  three  electricity  generating
plants at Southland,  a full year of operations  at Eden,  Edes,  Sul, Los Mina,
Altai and Lal Pir, and the start of  commercial  operations  at Pak Gen,  Barry,
Hefei,  and Jiaozou.  The increase in 1997 was caused  primarily by the costs of
electricity  sales  associated with the acquisition of controlling  interests in
Eden,  Edes,  Sul, Los Mina and Altai,  a full year of  operations  at Tisza and
Ekibastuz,  construction costs at Elsta, and the start of commercial  operations
at Lal Pir,  offset in part,  by lower  costs at San  Nicolas  due to lower fuel
prices.
GROSS MARGIN. Gross margin (revenues less costs of sales and services) increased
$381  million  (89%) to $811  million  from 1997 to 1998  after  increasing  $97
million  (29%) to $430  million  from  1996 to  1997.  The  improvement  in 1998
primarily  reflects the  additional  gross margin  contributed by the operations
from the acquisitions of Clesa, Edelap, and Southland, as well as a full year of
oper ations at Altai,  Los Mina,  Eden, Edes, Sul, and Lal Pir, the commencement
of commercial  operations at Pak Gen, Barry,  Hefei,  and Jiaozou in addition to
improved  performance at Tisza,  offset  slightly by lower margins at Ekibastuz.
The  improvement  in  1997  primarily   reflects  the  additional  gross  margin
contributed by the operations of Eden, Edes, Sul, Los Mina, Altai, Tisza and Lal
Pir,  and  improved  operations  at San Nicolas and  Thames.  Gross  margin as a
percentage  of  total  revenues  (net  of  the  provision  to  reduce   contract
receivables)  increased from 29% in 1997 to 33% in 1998, primarily due to higher
relative gross margin  percentages of newly operating or acquired  businesses at
Lal Pir, Pak Gen,  Southland,  and Barry,  improved gross margin  percentages at
Tisza, Eden, Edes and Sul, offset in part, by a lower gross margin percentage at
Ekibastuz.  Gross margin as a percentage of total revenues (net of the provision
to  reduce  contract  receivable)  decreased  from  37% in  1996  to 29% in 1997
primarily due to lower relative gross margin percentages of businesses  acquired
in 1996 and 1997  including  Tisza,  Ekibastuz,  Eden,  Edes,  Los Mina, Sul and
Altai, offset in part, by an improved gross margin percentage at San Nicolas.

     The  Company's  operations  are located in several  different  geographical
areas.  Seasonal  variations or unusual weather  conditions in certain  regions,
including  in  particular,  Argentina  and  Brazil,  or the  specific  needs  of
individual power plants to perform routine or unanticipated maintenance that may
require an outage,  could  significantly  affect comparable  quarterly financial
results. In addition, some power sales contracts permit the customer to dispatch
the  related  plant  (i.e.,  direct  the plant to  deliver  a reduced  amount of
electrical  output)  within  certain  specified  parameters.  Such  dispatching,
however,  does not have a material  impact on the results of  operations  of the
related subsidiary because, even when dispatched,  the plant's capacity payments
generally are not reduced.

SELLING,   GENERAL   AND   ADMINISTRATIVE   EXPENSES.   Selling,   general   and
administrative  expenses increased $11 million (24%) to $56 million from 1997 to
1998 after  increasing  $10 million (29%) to $45 million from 1996 to 1997.  The
1998 increase is attributable to expenses associated with the development of new
business  opportunities.  The 1997 increase is  attributable  to  administrative
costs.  As a percentage of total revenue,  selling,  general and  administrative
expenses decreased to 2% in 1998, down from 3% in 1997 and down from 4% in 1996.
The Company's  general and  administrative  costs do not  necessarily  vary with
changes in revenue.

OPERATING  INCOME.  Operating income improved $365 million (99%) to $733 million
from 1997 to 1998 after  increasing  $90 million (32%) to $368 million from 1996
to 1997. The increases are the result of the factors  discussed in the preceding
paragraphs.

OTHER INCOME/(EXPENSE). Other income and expense, on a net basis, increased $103
million  (123%) to $187 million from 1997 to 1998 after  increasing  $13 million
(18%) to $84 million from 1996 to 1997.  Interest expense  increased 99% in 1998
and increased 69% in 1997. The increase in 1998 reflects a full year of interest
expense associated with the senior subordinated notes and Tecons issued in 1997,
project financing debt relating to the 1997 and 1998 acquisitions and greenfield
projects that commenced  operations,  offset in part by lower  interest  expense
resulting from declining  balances related to other project  financing debt. The
increase in 1997 reflects a full year of interest  expense  associated  with the
senior  subordinated  notes  issued in 1996 and  1997,  project  financing  debt
relating to the 1996 and 1997 acquisitions, interest expense associated with the
senior  subordinated  notes and Tecons  issued in 1997,  offset in part by lower
interest  expense  resulting  from declining  balances  related to other project
financing debt.

     Interest  income  increased 63% in 1998 and 71% in 1997.  The 1998 increase
results primarily from interest income associated with late payments on customer
accounts at the  distribution  businesses,  offset by lower  interest  income at
Shady Point and Chigen
due to lower invested  funds.  The 1997 increase  results  primarily from higher
cash  balances as a result of the  issuances  of debt,  common stock and Tecons,
higher cash  balances at Chigen due to the issuance of the $180 million notes in
December  1996,  interest  income  at Eden  and  Edes  associated  with the late
payments on customer  accounts,  and interest on debt service reserves at Indian
Queens and Coral Reef (Light).

     Equity in pre-tax earnings of affiliates  increased 84% in 1998 and 157% in
1997.  The  increase  in 1998 was  primarily  due to a full  year of  equity  in
earnings from Cemig. The increase in 1997 results primarily from the acquisition
of an approximate  13.1% equity interest in Cemig (of which  approximately  3.7%
was sold to a partner in January  1998),  and a full year of equity in  earnings
from a 2.4%  increase  (to an aggregate  of 13.75%) in the  Company's  ownership
interest in Light.

INCOME TAXES.  The Company's  effective tax rate was 32% for 1998 as compared to
29% for 1997 and 37% for 1996.  The lower  rate in 1997 was due  primarily  to a
one-time tax benefit  realized as a result of a reduction in the  statutory  tax
rate of certain foreign countries.

EXTRAORDINARY  ITEM.  During  1998,  Chigen  redeemed $18 million of its 10.125%
notes resulting in an  extraordinary  gain of $4 million,  net of taxes.  During
1997, the Company redeemed its $75 million 9.75% Senior  Subordinated  Notes due
2000 resulting in an extraordinary loss of $3 million, net of taxes.

OUTLOOK. Global electricity markets continue restructuring and are shifting away
from  government-owned  and  government-regulated   electricity  systems  toward
deregulated,  competitive market structures. Many countries have rewritten their
laws and  regulations  to allow  foreign  investment  and private  ownership  of
electricity generation,  transmission or distribution companies.  Some countries
(for example Hungary, Brazil and some of those of the former Soviet Union, among
others) have or are in the process of "privatizing" their electricity systems by
selling  all or  part of  such  to  private  investors.  This  global  trend  of
electricity market restructuring provides significant new business opportunities
for companies like AES.

     Several  states in the U.S.  are also  beginning  to follow this trend.  In
particular,  many regulated U.S. public  utilities have begun to sell or auction
their   generation   capacity.   Substantially   all  of  the  transmission  and
distribution services in the U.S. continue however to be regulated under a state
and Federal regulatory  framework.  In addition,  many states have passed or are
considering new legislation that would permit utility  customers to choose their
electricity  supplier in a competitive  electricity  market  (so-called  "retail
access" or "customer choice" laws).  While each state's plan differs in details,
there are certain  consistent  elements,  including allowing customers to choose
their  electricity  suppliers  by a certain  date (the dates in the  existing or
proposed legislation vary between 1999 and 2003),  allowing utilities to recover
"stranded  assets" (the remaining  costs of uneconomic  generating or regulatory
assets) and a reaffirmation of the validity of contracts like the Company's U.S.
contracts.

     In addition to the potential for state restructuring legislation,  the U.S.
Congress has proposed new Federal  legislation to encourage  customer choice and
recovery of stranded assets.  Federal  legislation  might be needed to avoid the
conflicting  effect  of each  state  acting  separately  to  pass  restructuring
legislation  (with the likely result of uneven market  structures in neighboring
states).  While it is uncertain whether or when Federal legislation dealing with
electricity  restructuring  might be  passed,  the  Company  believes  that such
legislation would not likely have a negative effect on the Company's U.S.
business, and may create opportunities.

     There is also legislation currently before the U.S. Congress to repeal part
or all of the current provisions of the Public Utility  Regulatory  Policies Act
of  1978  ("PURPA")  and of the  Public  Utility  Holding  Company  Act of  1935
("PUHCA"). The Company believes that if such legislation is adopted, competition
in the U.S. for new generation  capacity from  vertically  integrated  utilities
would  increase.  However,  independents  like AES would also be free to acquire
retail utilities.

     As consumers,  regulators  and  suppliers  continue the debate about how to
further decrease the regulatory aspects of providing electricity  services,  the
Company  believes in and is encouraging
the continued  orderly  transition  to a more  competitive  electricity  market.
Inherent  in  any  significant  transition  to  competitive  markets  are  risks
associated with the competitiveness of existing regulated enterprises,  and as a
result, their ability to perform under long-term contracts such as the Company's
electricity  sale contracts.  Although AES strongly  believes that its contracts
will be honored,  there can be no  assurance  that each of its  customers,  in a
restructured and competitive  environment,  will be capable in all circumstances
of fulfilling their financial and legal obligations.

     AES's  investments  and  involvement in the development of new projects and
the acquisition of existing power plants and distribution companies in locations
outside the U.S. are  increasing.  The financing,  development  and operation of
such businesses may entail significant political and financial uncertainties and
other  structuring  issues  (including  uncertainties  associated with the legal
environments,  with first-time  privatization efforts in the countries involved,
currency  exchange  rate  fluctuations,   currency  repatriation   restrictions,
currency  inconvertibility,  political instability,  civil unrest and, in severe
cases, possible  expropriation).  Although AES attempts to minimize these risks,
these  issues  have  the  potential  to cause  substantial  delays  or  material
impairment  to the  value of the  project  being  developed  or  business  being
operated.

     It is  also  possible  that  as more of the  world's  markets  move  toward
competition, an increasing proportion of the Company's revenues may be dependent
on prices determined in electricity spot markets.  In order to capture a portion
of the market share in competitive  generation  markets,  AES is considering and
may elect to invest in and construct low-cost  "merchant" plants (plants without
long-term  electricity sale contracts) in those markets.  Such an investment may
require  the  Company  (as  well  as its  competitors)  to  make  larger  equity
contributions  (as a  percentage  of the  total  capital  cost)  than  the  more
traditional contract-based investments.

     In addition, to the extent that markets allow for retail access or customer
choice,  the Company may enter this new market segment,  either as extensions of
its generation or distribution businesses, or as a separate business enterprise.

     Because of the nature of AES's  operations,  its  activities are subject to
stringent environmental  regulation by relevant authorities at each location. If
environmental laws or regulations were to change in the future,  there can be no
assurance that AES would be able to recover all or any increased  costs from its
customers or that its business and financial  condition  would not be materially
and  adversely  affected.  In  addition,  the  Company or its  subsidiaries  and
affiliates  may  be  required  to  make  significant  capital   expenditures  in
connection  with  environmental  matters.  AES is  committed  to  operating  its
businesses  cleanly,  safely  and  reliably  and  strives  to  comply  with  all
environmental laws, regulations, permits and licenses but, despite such efforts,
at times has been in  non-compliance,  although no such instance has resulted in
revocation of any permit or license. 

YEAR 2000.  There are three  main  elements  in the  provision  of  electricity:
generation,   transmission  and  distribution,  all  of  which  form  a  tightly
integrated  "supplier  chain." In addition,  the Company's  businesses  are also
dependent  on  various  industries  supplying  water,  fuel  and  other  utility
services.  AES,  through its  subsidiaries  and affiliates,  is involved in each
aspect of the supplier  chain in various  countries  throughout  the world.  Set
forth below is information  regarding  AES's efforts to be prepared for problems
associated  with the  potential  inability of many  existing  computer  programs
and/or  embedded  computer chips to recognize the year 2000, both those in AES's
businesses as well as those that AES's businesses depend upon.

     Certain of these statements may constitute  forward-looking  information as
contemplated by the Private Securities  Litigation Reform Act of 1995, including
those regarding AES's expected readiness to handle Year 2000 problems,  expected
capital  expenditures in the areas of remediation and testing,  the future costs
associated  with  business  disruption  caused by supplier or customer Year 2000
problems  and the  success  of any  contingency  plans.  AES  cautions  that its
predictions  of the  extent  of  potential  problems  and the  effectiveness  of
measures designed to address them are based on numerous assumptions,  like those
regarding  the accuracy of  statements or  certifications  from  critical  third
parties and vendors,  the ability to identify and remediate or replace  embedded
computer chips in affected  equipment,  and resource  availability,  among other
things,  and readers should be aware that actual results might differ materially
from those discussed below.

     AES's  approach  to  analyzing  Year 2000  issues is to (1)  inventory  all
systems  and  equipment  likely  to  be  affected,   (2)  perform  an  inventory
assessment,  (3) conduct  remediations,  (4) test all equipment and systems, and
(5) develop contingency plans to aid in business continuity.

     AES's State of Readiness. In 1998, AES established a readiness program, led
by a senior  executive  and  consisting  of a team of AES people with  extensive
knowledge of AES's  businesses  and  processes,  as well as outside  consultants
experienced  in these  areas who are being used as advisors to assist with third
party analysis and contingency planning.

     AES estimates that it has identified the potential  issues at substantially
all of its generating facilities.  These issues consist of potential problems in
non-information  technology (IT) areas like AES's  distributed  control systems,
programmable  logic  control  systems,  gas and  electricity  metering  systems,
environmental emissions monitoring equipment, backup power systems and telephone
and  security  systems,  as well as more  traditional  IT  areas  like  computer
hardware and software  programs for  accounting,  payroll and billing  services,
among others.

     The  Company's  generation  plants  are  also  significantly  dependent  on
transmission and  distribution  systems to carry the electricity to the ultimate
end users.

     The Company also believes that it has  identified  the potential  issues at
substantially  all  of its  distribution  companies.  These  issues  consist  of
potential problems in the digital relays and meters,  its radio systems,  energy
management  systems,  system control and data  management,  and billing systems,
among others.

     Due to the  interdependent  nature of the supply  chain,  the  Company  has
extended  its   evaluation  of  Year  2000  issues  to  include  key  suppliers,
transmission companies,  customers and vendors, and has sought written assurance
from these  parties  as to their Year 2000  readiness.  The  Company  expects to
complete  steps one  through  four  referred  to above by the end of the  second
quarter of 1999.

     The Company's  businesses are currently working through planned programs in
order to achieve Year 2000 readiness.  These programs  include,  where possible,
actual  simulations  of the Year 2000,  focusing on the key dates that have been
identified  as potential  problems.  A number of  simulations  have already been
conducted with no adverse impacts on those AES businesses.

     Costs of  Addressing  Year 2000  Issues.  Based on internal  analysis,  AES
expects to spend a total of $15 million to $18 million to achieve full Year 2000
readiness company-wide. These amounts reflect AES's portion of expected costs to
make its businesses Year 2000 ready,  but not  necessarily the costs  associated
with post-Year 2000 corrective actions or damage, if any. The Company expects to
fund these expenditures through internal sources.

     Risks of Year 2000 Failures.  Failures by each of the Company's  generation
and  distribution  companies  to address  Year 2000 issues may lead to numerical
errors that,  if not  addressed  or  mitigated,  may cause  system  malfunctions
resulting in the  inability to deliver  electricity  or the inability to collect
data necessary for proper billing and tariff calculations, among other things.

     The  Company's  generating   businesses  may  also  be  unable  to  deliver
electricity because of the failure of the interconnected  distribution companies
to receive or transmit the electricity.  Conversely,  the Company's distribution
companies may not receive  sufficient  electricity to deliver to their customers
because of failures  by  supplying  generators.  In such  instances  of business
interruption  due to supplier or customer  default,  the Company will pursue all
contractual  remedies  available  to it to minimize the impact on its results of
operations;  however,  there can be no assurance  that,  in all  instances,  the
Company will be able to legally  protect itself from damages  arising from third
party Year 2000  failures.  Because of the  significant  interdependency  of the
supplier chain, the Company cannot guarantee that services will be uninterrupted
nor can it  adequately  predict a reasonably  likely worst case  scenario  until
substantially all of the testing phase is completed.

     Contingency  Plans.  The  Company  (together  with  appropriate  interested
parties like transmission companies, independent system operators and government
agencies)  is  still in the  process  of  identifying  and  testing  appropriate
contingency  plans addressing  emergency  operations,  disaster  recovery,  data
preservation and business  continuation plans, and intends to have them in place
by the fourth  quarter of 1999.  The plans will be  continuously  refined as new
information becomes available.
FINANCIAL POSITION AND CASH FLOWS

At December 31,  1998,  AES had negative  consolidated  working  capital of $722
million  as  compared  to $14  million  at the end of  1997.  The  increase  was
primarily  due to increases  in the current  portion of project  financing  debt
discussed later under "Capital Resources and Liquidity."

     Property, plant and equipment, net of accumulated depreciation,  was $5,504
million at December 31, 1998, up from $4,149 million at the end of 1997. The net
increase of $1,355 million (33%) is primarily  attributable to the  acquisitions
during 1998 and the continuation of construction  activities at Warrior Run, Mt.
Stuart and Uruguaiana and the commencement of construction at Merida.

     Other assets  increased $453 million (13%) to $4,023 million  primarily due
to payments for deferred  financing costs associated with debt issued during the
year, additional capitalized amounts associated with projects in development and
early stage  construction,  the  acquisition  of a 49% share of the Orissa Power
Generation  Corporation (OPGC) and undistributed  earnings from Cemig,  deferred
foreign  currency  losses that will be recovered  through tariff  adjustments as
provided  for in certain  power sales  contracts,  the  purchase of a concession
contract  associated  with the  acquisition  of Edelap,  and  goodwill  from the
purchase of Southland,  offset by reductions in the carrying values of Cemig and
Light and the concession contract at Sul due to the devaluation of the Brazilian
Real.

     Project  financing  debt,  net of  repayments,  increased  as a  result  of
additional borrowings  associated with the acquisitions of Clesa,  Southland and
Edelap and additional  borrowings  associated with  construction at Warrior Run,
Barry, Mt. Stuart, Uruguaiana and Merida.

     Other notes payable  (non-current)  increased  $548 million (50%) to $1,644
million as a result of the issuances of additional  debt to finance current year
acquisitions.  

OPERATING  ACTIVITIES.  Cash flows provided by operating activities totaled $528
million  during 1998 as compared to $193  million  during 1997 and $195  million
during 1996. The 1998 increase was caused primarily by a significant increase in
net  income,  an  increase  in  distributions  from  affiliates,  and changes in
consolidated working capital. The decrease in 1997 was primarily due to a larger
portion of net income being derived from undistributed  earnings from affiliates
and increased net working capital  (excluding  project financing debt) necessary
to support electricity sales at AES's distribution businesses.  Unrestricted net
cash flow to the parent company,  after cash paid for general and administrative
costs and project development  expenses but before investments and debt service,
amounted to  approximately  $360 million,  $259 million and $165 million for the
years ended December 31, 1998, 1997 and 1996, respectively.

INVESTING  ACTIVITIES.  Net cash used in  investing  activities  totaled  $1,842
million in 1998 compared to $3,799 million during 1997 and $1,135 million during
1996. The 1998 amount was caused primarily by construction activities at various
projects and the acquisitions of Clesa,  Southland,  Edelap, OPGC, Telasi and an
additional 5.6% of Sul. These investing uses were offset,  in part, by the sales
of  Hazelwood,  approximately  3.7% of the  Company's  investment in Cemig and a
minority  interest  of  30%  of  Edelap.  The  1997  amount  primarily  reflects
construction  activity at Barry,  Lal Pir, Pak Gen, Warrior Run, and Mt. Stuart,
an additional purchase of Light shares (2.4%),  acquisition of a 60% interest in
each of Eden and Edes,  the  acquisition  of an  approximate  13.1%  interest in
Cemig,  acquisition of Destec's  international assets, the acquisition of 90% of
Sul,  acquisition  of an 85% interest in Altai,  and the funding of debt service
reserves related to Chigen.  The 1996 amount primarily reflects the acquisitions
of San Juan, Tisza and Ekibastuz,  the Light investment construction progress at
Lal Pir,  Pak Gen,  Warrior  Run and  Barry,  Chigen's  investments  in  various
projects,   reimbursable   payments  for  contracts  related  to  a  project  in
development;  and the funding of debt service reserves for the project financing
of the Light investment.

FINANCING  ACTIVITIES.  Net cash  provided by  financing  activities  aggregated
$1,503  million  during  1998  compared to $3,723  million  during 1997 and $886
million during 1996. The 1998 activity was caused  primarily by the borrowing of
bank and other project debt associated with the  acquisitions,  issuance of $350
million  of  corporate  long-term  debt and $200  million  of  common  stock and
borrowings under the Revolver.  These financing sources were partially offset by
repayments of acquisition  related  bridge loans and scheduled debt  repayments.
The 1997 increase was primarily  due to the issuance of project  financing  debt
drawn under  construction  financing  commitments or associated with acquisition
financings,  the issuance of senior  subordinated  notes, the issuance of Tecons
and common stock,  and  contributions  from minority  partners.  These financing
inflows  were  offset  by  project  financing  debt  amortization  payments  and
refinancing  and repayments  under the Company's  revolving line of credit.  The
significant cash financing  inflows in 1996 were the result of construction loan
borrowings for Lal Pir, Pak Gen and Warrior Run, project  acquisition  financing
of the Light  investment,  issuance  of $250  million of 10.25%  Notes,  initial
project  financing  at San  Nicolas,  and net  borrowings  under  the  Company's
revolving  line of  credit.  Significant  cash  financing  outflows  were due to
scheduled debt amortization of the project financings.
CAPITAL RESOURCES, LIQUIDITY AND MARKET RISKS

CAPITAL RESOURCES AND LIQUIDITY  

AES's  business is capital  intensive and requires  significant  investments  to
develop or acquire new operations. Occasionally, AES will also seek to refinance
certain  outstanding  project financing loans or other notes payable.  Continued
access to capital on competitive and acceptable terms is therefore a significant
factor in the  Company's  ability  to expand  further.  AES has,  to the  extent
practicable,  utilized project financing loans to fund the capital  expenditures
and  investments  required to construct  and acquire its electric  power plants,
distribution  companies and related  assets.  Project  financing  borrowings are
substantially  non-recourse to other  subsidiaries  and affiliates and to AES as
the parent  company and are  generally  secured by the capital  stock,  physical
assets, contracts and cash flow of the related subsidiary or affiliate.

     The Company intends to continue to seek, where possible,  such non-recourse
project  financing in connection with the assets or businesses which the Company
or its  affiliates  may  develop,  construct or acquire.  However,  depending on
market conditions and the unique characteristics of individual  businesses,  the
Company's providers of project financing,  particularly multinational commercial
banks or public market bond  investors,  may seek higher  borrowing  spreads and
increased equity contributions.

     Furthermore,  because of the reluctance of commercial lending  institutions
to provide non-recourse  project financing (including financial  guarantees) for
businesses in certain less developed economies,  the Company, in such locations,
has and will  continue  to seek direct or indirect  (through  credit  support or
guarantees)  project  financing from a limited  number of government  sponsored,
multilateral or bilateral international financial institutions or agencies. As a
precondition to making such project financing available,  these institutions may
also require  governmental  guarantees of certain project and sovereign  related
risks.  Depending on the policies of specific  governments,  such guarantees may
not be offered,  and as a result,  AES may determine that  sufficient  financing
will  ultimately  not be available to fund the related  business,  and may cease
development or acquisition of such business.

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

     At  December  31,  1998,  the  current  portion of project  financing  debt
included $1,053 million of short-term loans incurred to finance the acquisitions
of Sul ($729  million)  in Brazil and Eden,  Edes and Edelap  ($324  million) in
Argentina.  The  Company's  intention  is to replace  such loans with  long-term
project  financing  loans  with  terms  that  more  appropriately   reflect  the
underlying long-term concessions. As a result of the current economic conditions
in those countries, including the significant devaluation of the Brazilian Real,
the  Company  expects  that it will  not be able to  refinance  certain  of such
project financing loans on terms (interest rates,  maturity or amounts) that AES
would consider acceptable without making significant additional investments.  In
such circumstances, AES, as the parent company, would provide additional amounts
in the form of equity  investments,  or intercompany  loans or additional credit
support  to repay  some or all of the  existing  short-term  acquisition  loans.
Depending on the magnitude of such additional  investments or loans, the Company
may also need to issue additional debt, common stock or other similar securities
to fund such additional contributions.

     Interim needs for shorter-term and working capital  financing at the parent
company  have  been met with  borrowings  under  AES's  Revolver.  Over the past
several  years,  the Company has  continued  to increase the amount of available
financing  under the Revolver.  The Company  currently  maintains a $600 million
credit limit under the Revolver. Under the terms of the Revolver, the Company is
required to reduce its direct borrowings to $225 million for 30 consecutive days
during each twelve month period. The Revolver also includes financial  covenants
related to net worth,  cash flow,  investments,  financial  leverage and certain
other obligations and limitations on cash dividends.  At December 31, 1998, cash
borrowings and letters of credit outstanding under the Revolver amounted to $233
million and $194 million,  respectively.  The Company may also seek from time to
time to meet some of its  short-term and interim  funding needs with  additional
commitments  from  banks  and  other  financial  institutions  at the  parent or
subsidiary level.

     The  ability  of AES's  subsidiaries  and  affiliates  to  declare  and pay
dividends to AES is  restricted  under the terms of existing  project  financing
debt  agreements.  See  Note  5 to the  consolidated  financial  statements  for
additional  information.  In connection with its project  financings and related
contracts,   AES  has  expressly  undertaken  certain  limited  obligations  and
contingent  liabilities,  most  of  which  will  only  be  effective  or will be
terminated  upon  the  occurrence  of  future  events.   AES's  obligations  and
contingent  liabilities  in certain cases take the form of, or are supported by,
letters of credit.  These  obligations  and  contingent  liabilities,  excluding
future  commitments  to invest and those  collateralized  with  letter of credit
obligations  under the Revolver,  were limited by their terms as of December 31,
1998 to an
aggregate of  approximately  $399 million.  The Company is obligated under other
contingent  liabilities which are limited to amounts, or percentages of amounts,
received by AES as distributions from its project subsidiaries. These contingent
liabilities aggregated $33 million as of December 31, 1998. In addition, AES has
expressly undertaken certain other contingent obligations which the Company does
not expect to have a material  adverse  effect on its results of  operations  or
financial position,  but which by their terms are not capped at a dollar amount.
Because  each  of  the   Company's   businesses   are   distinct   entities  and
geographically  diverse and because the obligations related to a single business
are based on contingencies of varying types, the Company believes it is unlikely
that it will be called upon to perform under several of such  obligations at any
one time.

     At  December  31,  1998,  the  Company  has  future   commitments  to  fund
investments  in  its  projects  under  construction  and in  development  of $37
million.  Of this  amount,  $18 million in letters of credit  under the Revolver
have been issued to support a portion of these obligations. The remaining future
capital commitments are expected to be funded by internally-generated cash flows
and by  external  financings  as may be  necessary.  

MARKET RISKS

The  Company  attempts,  whenever  possible,  to hedge  certain  aspects  of its
projects  against the effects of  fluctuations  in  inflation,  interest  rates,
exchange  rates  and  energy  prices.  Because  of  the  complexity  of  hedging
strategies and the diverse  nature of AES's  operations,  its results,  although
significantly  hedged,  will likely be somewhat  and in certain  cases,  such as
Brazil,  materially  affected  by  fluctuations  in  these  variables  and  such
fluctuations  may result in material  improvement or  deterioration of operating
results.  Results of  operations  would  generally  improve  with higher oil and
natural gas prices and with lower  interest  rates.  Operating  results are also
sensitive to the  difference  between  inflation and interest  rates,  and would
generally  improve  when  increases in  inflation  are higher than  increases in
interest rates. As discussed under "Results of Operations" and below, the recent
devaluation of the Brazilian Real will have a material  negative impact on AES's
results of operations in 1999.

     AES has generally structured the energy payments under its power generation
sales  contracts to adjust with similar price  indices as do its contracts  with
the fuel suppliers for the  corresponding  power plants. In some cases a portion
of revenues is associated with operations and maintenance  costs, and as such is
usually indexed to adjust with inflation.

     AES primarily  consists of businesses  with  long-term  contracts or retail
sales  concessions.  While the  contract-based  portfolio  is  expected to be an
effective hedge against future energy and electricity  market price risks, it is
worth  noting  that a portion of AES's  current  and  expected  future  revenues
(particularly those related to certain portions of its generation  businesses in
Kazakhstan,  the UK,  Argentina,  Hungary and Texas) are derived from businesses
without  significant  long-term revenue contracts.  In some of these businesses,
AES has taken additional steps to improve their predictability, in the Company's
opinion,  by using other  contractual  hedging  provisions such as entering into
fuel supply  contracts that absorb a significant  portion of the  variability in
electricity sales prices. Despite these mitigating factors,  increasing reliance
on  non-contract  businesses  in AES's  portfolio  does  subject  the Company to
potentially increasing electricity market price volatility.

     The  hedging  approaches  and  methodologies  utilized  by the  Company are
implemented  through contractual  provisions with fuel suppliers,  international
financial  institutions  and several of the  Company's  customers.  As a result,
their  effectiveness is dependent,  in part, on each  counterparty's  ability to
perform in accordance with the provisions of the relevant contract.  The Company
has sought to reduce this credit risk in part by entering into contracts,  where
possible,  with  creditworthy  organizations.  In certain  instances,  where the
Company determines that additional credit support is necessary, AES will seek to
execute  (either  concurrently  or  subsequently)  standby,  guarantee or option
agreements with creditworthy third parties. In particular,  AES has executed and
is  the   beneficiary  of  fuel  purchase  option   agreements,   corporate  and
governmental  guarantees to support the  obligations  of local fuel suppliers in
several  locations  and  sovereign   governmental   guarantees   supporting  the
electricity purchase obligation of government-owned  power authorities,  such as
in the Dominican Republic and Pakistan.

     AES has also used a hedging strategy in an attempt to insulate each plant's
financial  performance,  where appropriate,  against the risk of fluctuations in
interest rates.  Depending on whether  capacity  payments are fixed or vary with
inflation,  the  Company  generally  attempts  to hedge  against  interest  rate
fluctuations by arranging  fixed rate or variable rate financing,  respectively.
In certain  cases,  the  Company  executes  interest  rate  swap,  cap and floor
agreements  to  effectively  fix or limit  the  interest  rate  exposure  on the
underlying  variable rate  financing.  At December 31, 1998, the Company and its
subsidiaries had approximately $2,505 million of fixed rate debt obligations. In
addition, the Company had entered into interest rate swap agreements and forward
interest  rate swap  agreements  aggregating  approximately  $1,366  million  at
December 31, 1998, which the Company used to hedge its interest rate exposure on
variable rate debt.

     Through its equity investments in foreign subsidiaries and affiliates,  AES
operates  in  jurisdictions  dealing  in  currencies  other  than the  Company's
consolidated  reporting currency, the U.S. Dollar. Such investments and advances
were made to fund capital  investment or  acquisition  requirements,  to provide
working  capital,  or to provide  collateral  for  contingent  obligations.  Due
primarily to the  long-term  nature of certain  investments
and  advances,   the  Company  accounts  for  any  adjustments   resulting  from
translation  as  a  charge  or  credit  directly  to  a  separate  component  of
stockholders'  equity  until such time as the  Company  realizes  such charge or
credit.  At  that  time,  differences  may be  recognized  in the  statement  of
operations as gains or losses.

     In addition,  certain of the Company's foreign  subsidiaries and affiliates
have entered into monetary obligations in U. S. Dollars or currencies other than
their  own  functional  currencies.  When  monetary  assets or  obligations  are
incurred  in a  currency  other  than  a  foreign  subsidiary's  or  affiliate's
functional  currency,  that entity may be exposed to reporting  foreign currency
transaction gains or losses based on fluctuations  between the relative value of
that  entity's  functional  currency and the  currency of the monetary  asset or
liability.  Whenever  possible,  these  subsidiaries  have  attempted  to  limit
potential  foreign  exchange  exposure by entering into revenue  contracts which
adjust to changes in the foreign exchange rates.  Certain foreign affiliates and
subsidiaries  operate in countries  where the local  inflation rates are greater
than U.S.  inflation  rates. In such cases the foreign currency tends to devalue
relative to the U.S. Dollar over time. The Company's subsidiaries and affiliates
have  entered  into  revenue   contracts  which  attempt  to  adjust  for  these
differences;  however,  there can be no  assurance  that such  adjustments  will
compensate for the full effects of currency devaluation, if any.

     At December 31, 1998, the Company,  and its subsidiaries had  approximately
$613 million in outstanding  debt that was denominated in currencies  other than
the U.S.  Dollar and  approximately  $574 million in  outstanding  debt that was
denominated  in  currencies  other  than the  relevant  subsidiary's  functional
currency. In addition, certain Brazilian Businesses whose functional currency is
the Brazilian Real have (after adjusting for AES's ownership  percentages)  U.S.
Dollar demoninated debt that amounts to $439 million.

     As discussed in "Results of Operations,"  the Brazilian Real  experienced a
significant  devaluation  in early 1999. As a result,  the Brazilian  Businesses
will also experience  noncash,  foreign currency  transaction  losses associated
with the  impact of changes in the value of the  Brazilian  Real on the  foreign
currency  (non-functional  currency)  denominated debt (primarily U.S.  Dollars)
within the Brazilian Businesses. If the exchange rate of 1.79 Brazilian Reais to
the dollar (the closing exchange rate on February 3, 1999) were to prevail until
the end of 1999,  the  Company  estimates  that its  proportionate  share of the
after-tax foreign currency transaction loss would be approximately $105 million.
In  addition,   such   devaluation   would  result  in  a  related  increase  of
approximately  $760 million in the balance of the  cumulative  foreign  currency
translation adjustment reflected as a reduction of stockholders' equity; as well
as a corresponding  reduction in the carrying value of the related assets. These
estimates  do not reflect  the  likelihood  of  additional  fluctuations  in the
exchange rates.

     The  table  on the next  page  provides  information  about  the  Company's
financial instruments and derivative financial instruments that are sensitive to
changes in interest rates, in particular, debt obligations, Tecons, and interest
rate swaps.  AES does not trade in these  financial  instruments and derivatives
and therefore has classified  them as other than trading.  For debt  obligations
and Tecons, the table presents principal cash flows and related weighted average
interest  rates by  expected  matur  ity  dates  over the next  five  years  and
thereafter.  For interest rate swaps, the table presents  aggregate  contractual
notional  amounts and weighted  average interest rates over the next five years.
Notional amounts are used to calculate the contractual  payments to be exchanged
under the contract. Weighted average variable rates are based on implied forward
rates in the yield curve at December 31, 1998.  The  information is presented in
U.S.  Dollar  equivalents,  which  is  the  Company's  reporting  currency.  The
instruments'  actual cash flows are denominated in U.S. Dollars (USD),  Japanese
Yen (JPY),  Australian  Dollars (AUD),  Chinese  Renminbi Yuan (CHY),  UK Pounds
Sterling (GBP),  Indian Rupees (INR),  Hungarian Forints (HUF), and German Marks
(DEM) as indicated in parentheses as of December 31, 1998.
December 31, 1998
====================================================================================================================================
FINANCIAL INSTRUMENTS                                                                   THERE-       1998        1997        1998
By expected maturity date                   1999     2000     2001     2002    2003      AFTER      TOTAL       TOTAL     FAIR VALUE
====================================================================================================================================
Debt (USD equivalents in millions, 
     except interest rates) 
Long-term debt:
  Fixed rate (USD)                           75        52       54      19       23      2,173     2,396       2,077       2,410
   Average interest rate                    9.6%      9.7%    10.1%   10.7%    11.2%       8.8%      8.9%        9.4%         --
  Variable rate (USD)                     1,268       448      199     200      177      1,217     3,509       2,516       3,509
    Average interest rate                   8.0%      7.4%     7.5%    7.5%     7.3%       6.5%      7.3%        7.8%         --
  Fixed rate (JPY)                            7         7        7       7        7         23        58          54          59
    Average interest rate                   2.5%      2.5%     2.5%    2.5%     2.5%       2.5%      2.5%        2.5%         --
  Variable rate (JPY)                        28        28       28      28       28         96       236         213         236
    Average interest rate                   3.5%      3.5%     3.5%    3.5%     3.5%       3.5%      3.5%        3.8%         --
  Variable rate (GBP)                         4         7        7      12       16        137       183         176         183
     Average interest rate                  7.3%      7.3%     7.3%    7.3%     7.3%       7.2%      7.2%        8.9%         --
  Variable rate (AUD)                         3         4        4       5        5         36        57           5          57
    Average interest rate                   7.1%      7.1%     7.1%    7.1%     7.1%       7.1%      7.1%        7.7%         --
  Fixed rate (CHY)                            3        --       --      --       --         --         3           2           3
    Average interest rate                   7.5%       --       --      --       --         --       7.5%       11.1%         --
  Fixed rate (INR)                           --        --       48      --       --         --        48          --          48
     Average interest rate                   --        --     13.9%     --       --         --      13.9%         --          --
  Variable rate (HUF)                         2        --       --      --       --         --         2          --           2
    Average interest rate                  17.5%       --       --      --       --         --      17.5%         --          --
  Variable rate (DEM)                        15        11       --      --       --         --        26          --          26
    Average interest rate                   4.6%      4.6%      --      --       --         --       4.6%         --          --
------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT                                1,405       557      347     271      256      3,682     6,518       5,043       6,533
------------------------------------------------------------------------------------------------------------------------------------
TECONS
  Fixed rate (USD)                           --        --       --      --       --        550       550         550         657
    Average interest rate                    --        --       --      --       --        5.4%      5.4%        5.4%         --
====================================================================================================================================
December 31, 1998
=================================================================================================================================
DERIVATIVE FINANCIAL INSTRUMENTS                                                                                         1998
By aggregate notional amounts outstanding at December 31    1998      1999      2000     2001      2002       2003    FAIR VALUE
=================================================================================================================================
INTEREST RATE SWAPS (USD equivalents in millions,         
     except interest rates)                               
  Variable rate (USD)                                        944      715       762       708        646       587        101
    Average pay rate                                        8.04%    7.80%     7.66%     7.62%      7.61%     7.56%        --
    Average receive rate                                    5.07%    5.00      5.21%     5.28%      5.40%     5.40%        --
  Variable to fixed (GPB)                                    182      182       182       182        182       182         11 
    Average pay rate                                        6.15%    6.17%     6.17%     6.17%      6.17%     6.17%        --
    Average receive rate                                    5.95%    5.17%     5.47%     5.39%      5.27%     5.20%        --
  Variable to fixed (AUD)                                     54       52        48        35         31        28          8 
    Average pay rate                                        7.38%    7.38%     7.38%     7.38%      7.38%     7.38%        --
    Average receive rate                                    4.80%    5.02%     5.43%     4.97%      5.63%     6.60%        --
---------------------------------------------------------------------------------------------------------------------------------
TOTAL                                                      1,180      949       992       925        859       797        120
=================================================================================================================================
The  table  below  provides   information  about  the  Company's  financial
instruments by functional  currency and presents such information in U.S. Dollar
equivalents.  The table summarizes information on instruments that are sensitive
to foreign currency exchange rates.

     These instruments are debt obligations of the Company's  subsidiaries which
are denominated in currencies other than that subsidiary's  functional currency.
AES does not trade in these  financial  instruments and therefore has classified
them as other than trading.  Such  functional  currencies  include the Argentine
Peso (ARS),  the  Pakistan  rupee (PKR),  and the U.S.  Dollar  (USD).  For debt
obligations,  the table  presents  principal  cash  flows and  related  weighted
average  interest  rates by expected  maturity dates for the next five years and
thereafter.
December 31, 1998
====================================================================================================================================
FINANCIAL INSTRUMENTS                                                                      THERE-       1998     1997       1998
By expected maturity date                   1999     2000      2001      2002     2003      AFTER      TOTAL    TOTAL    FAIR VALUE
====================================================================================================================================
LIABILITIES (USD equivalents in millions, 
     except interest rates) 
LONG-TERM DEBT:
ARS Functional Currency:
  Fixed rate (USD)                            61       34        10        --       --         --       105        67         101
    Average interest rate                    9.4%     9.2%     10.2%       --       --         --       9.4%     10.3%         --
  Variable Rate (USD)                          3        3         1        --       --         --         7         9           7
    Average interest rate                   10.1%    10.1%     10.1%       --       --         --      10.1%     10.6%         --
PKR Functional Currency:
  Fixed rate (USD)                             7        7         7         8        8         41        78        78          78
    Average interest rate                    8.7%     8.8%      8.9%      9.0%     9.0%      10.0%      9.5%      9.2%         --
  Variable rate (USD)                          6        6         7         7        7         32        65        56          65
    Average interest rate                    8.4%     8.4%      8.4%      8.5%     8.5%       8.6%      8.5%      8.8%         --
  Fixed rate (JPY)                             7        7         7         7        7         22        57        54          59
    Average interest rate                    2.5%     2.5%      2.5%      2.5%     2.5%       2.5%      2.5%      2.5%         --
  Variable rate (JPY)                         28       28        28        28       28         96       236       213         236
    Average interest rate                    3.5%     3.5%      3.5%      3.5%     3.5%       3.5%      3.5%      3.8%         --
USD Functional Currency:
  Variable rate (DEM)                         15       11        --        --       --         --        26        --          26
    Average interest rate                    4.6%     4.6%       --        --       --         --       4.6%       --          --
------------------------------------------------------------------------------------------------------------------------------------
TOTAL                                        127       96        60        50       50        191       574       477         572
====================================================================================================================================
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS

     (a) Financial Statements:

     The Company's consolidated balance sheets as of December 31, 1998 and 1997,
and the related consolidated statements of operations,  changes in stockholders'
equity and cash flows for each of the three years in the period  ended  December
31, 1998.
INDEPENDENT AUDITORS' REPORT

TO THE STOCKHOLDERS OF THE AES CORPORATION:

We  have  audited  the  accompanying  consolidated  balance  sheets  of The  AES
Corporation and subsidiaries (the Company) as of December 31, 1998 and 1997, and
the related  consolidated  statements of  operations,  changes in  stockholders'
equity,  and cash flows for each of the three years in the period ended December
31, 1998.  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  as of  December  31,  1998  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Washington, DC
February 4, 1999
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
 FOR THE YEARS ENDED DECEMBER 31                                                             1998            1997            1996
------------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Sales                                                                                       $ 2,382         $ 1,361         $   824
Services                                                                                         16              50              11
------------------------------------------------------------------------------------------------------------------------------------
Total revenues                                                                                2,398           1,411             835
------------------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales                                                                                 1,579             940             495
Cost of services                                                                                  8              41               7
Selling, general and administrative expenses                                                     56              45              35
Provision to reduce contract receivables                                                         22              17              20
------------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses                                                            1,665           1,043             557
------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME                                                                                733             368             278
OTHER INCOME/(EXPENSE):
Interest expense                                                                               (485)           (244)           (144)
Interest income                                                                                  67              41              24
Foreign currency exchange loss                                                                   (1)             (7)             --
Equity in pre-tax earnings of affiliates                                                        232             126              49
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST, AND EXTRAORDINARY ITEM                           546             284             207
INCOME TAXES                                                                                    145              77              74
MINORITY INTEREST                                                                                94              19               8
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM                                                                307             188             125
Extraordinary item - gain/(loss) on extinguishment
of debt - net of applicable income taxes/(benefit)                                                4              (3)             --
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME                                                                                  $   311         $   185         $   125
====================================================================================================================================

BASIC EARNINGS PER SHARE:
BEFORE EXTRAORDINARY ITEM                                                                   $  1.73         $  1.13         $  0.83
EXTRAORDINARY ITEM                                                                             0.02           (0.02)             --
------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE                                                                    $  1.75         $  1.11         $  0.83
====================================================================================================================================

DILUTED EARNINGS PER SHARE:
BEFORE EXTRAORDINARY ITEM                                                                   $  1.67         $  1.11         $  0.80
EXTRAORDINARY ITEM                                                                             0.02           (0.02)             --
------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE                                                                  $  1.69         $  1.09         $  0.80
====================================================================================================================================
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
                                                                   (in millions)
================================================================================
DECEMBER 31                                                 1998           1997
================================================================================
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                $    491      $    302
Short-term investments                                         35           127
Accounts receivable, net                                      365           323
Inventory                                                     119            95
Asset held for sale                                            --           139
Receivable from affiliates                                     18            23
Deferred income taxes                                          71            47
Prepaid expenses and other current assets                     155           134
-------------------------------------------------------------------------------
Total current assets                                        1,254         1,190

PROPERTY, PLANT AND EQUIPMENT:
Land                                                          135            29
Electric generation and distribution assets                 5,301         3,809
Accumulated depreciation and amortization                    (525)         (373)
Construction in progress                                      593           684
-------------------------------------------------------------------------------
Property, plant and equipment, net                          5,504         4,149

OTHER ASSETS:
Deferred financing costs, net                                 167           122
Project development costs                                     144            87
Investments in and advances to affiliates                   1,933         1,863
Debt service reserves and other deposits                      205           236
Electricity sales concessions and contracts                 1,280         1,179
Goodwill                                                       66            23
Other assets                                                  228            60
-------------------------------------------------------------------------------
Total other assets                                          4,023         3,570
-------------------------------------------------------------------------------
TOTAL                                                    $ 10,781      $  8,909
================================================================================
See notes to consolidated financial statements.
(in millions, except par value)
=======================================================================================================================
December 31                                                                                  1998                 1997
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                                                           $  215              $   205
Accrued interest                                                                              113                   68
Accrued and other liabilities                                                                 235                  335
Other notes payable - current portion                                                           8                   --
Project financing debt - current portion                                                    1,405                  596
-----------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                   1,976                1,204

LONG-TERM LIABILITIES:
Project financing debt                                                                      3,597                3,489
Other notes payable                                                                         1,644                1,096
Deferred income taxes                                                                         268                  273
Other long-term liabilities                                                                   220                  291
-----------------------------------------------------------------------------------------------------------------------
Total long-term liabilities                                                                 5,729                5,149

MINORITY INTEREST                                                                             732                  525
COMMITMENTS AND CONTINGENCIES (NOTE 6)                                                         --                   --
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
  PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING
  SOLELY JUNIOR SUBORDINATED DEBENTURES OF AES                                                550                  550
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: 1998 - 180.4 million;
  1997 - 175.0 million)                                                                         2                    2
Additional paid-in capital                                                                  1,243                1,030
Retained earnings                                                                             892                  581
Accumulated other comprehensive loss                                                         (343)                (131)
Treasury stock at cost (1997 - .2 million shares)                                              --                   (1)
-----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                  1,794                1,481
-----------------------------------------------------------------------------------------------------------------------
TOTAL                                                                                     $10,781              $ 8,909
-----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                (in millions, except per share amounts)
=======================================================================================================================
For the Years Ended December 31                                              1998               1997              1996
=======================================================================================================================
OPERATING ACTIVITIES:
Net income                                                                   $311               $185              $125
Adjustments to net income:
  Depreciation and amortization                                               196                114                65
  Provision for deferred taxes, net of equity investee taxes                   67                 20                26
  Undistributed earnings of affiliates, net of tax                            (50)               (57)              (20)
  Other                                                                        (6)                22                 6
Changes in consolidated working capital                                        10                (91)               (7)
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                     528                193               195
INVESTING ACTIVITIES:
Property additions                                                           (517)              (511)             (506)
Acquisitions, net of cash acquired                                         (1,623)            (2,454)             (148)
Proceeds from the sales of assets                                             301                 --                --
Sale of short-term investments                                                 94                 77               103
Purchase of short-term investments                                             (2)              (184)              (66)
Affiliate advances and equity investments                                     (69)              (649)             (430)
Project development costs                                                     (57)               (34)              (16)
Debt service reserves and other assets                                         31                (44)              (72)
-----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES                                      (1,842)            (3,799)           (1,135)
FINANCING ACTIVITIES:
Borrowings/(repayments) under the revolver, net                               206               (186)              163
Issuance of project financing debt and other coupon bearing securities      1,843              3,926               802
Repayments of project financing debt and other coupon bearing securities     (668)              (749)              (75)
Payments for deferred financing costs                                         (47)               (34)              (13)
Repayments of other liabilities                                               (71)                (6)               (3)
Contributions by minority interests                                            40                269                10
Sale of common stock                                                          200                503                 2
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                   1,503              3,723               886
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                              189                117               (54)
CASH AND CASH EQUIVALENTS, BEGINNING                                          302                185               239
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, ENDING                                            $491               $302              $185
=======================================================================================================================

SUPPLEMENTAL DISCLOSURES:
Cash payments for interest, net of amounts capitalized                       $415               $201              $134
Cash payments for income taxes, net of refunds                                 24                 31                32
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred purchase price of Cemig shares                                       $--               $528              $ --
Common stock issued for amalgamation of AES Chigen                             --                157                --
Conversion of subordinated debentures to common stock                          --                 --                50
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                                                                          (in millions)
-----------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31                                             1998                1997              1996
-----------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at January 1 and December 31                                    $       2         $        2           $     2
-----------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at January 1                                                       $1,030             $  359            $  292
Issuance of common stock                                                      184                494                --
Issuance of common stock pursuant to Chigen amalgamation                       --                157                --
Issuance of common stock under benefit plans
   and exercise of stock options and warrants                                  16                 12                 3
Tax benefit associated with the exercise of options                            13                  8                15
Issuance of common stock on conversion of 6.5% subordinated
   debentures, net ($13.08 per share)                                          --                 --                49
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31                                                     $1,243             $1,030            $  359
-----------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at January 1                                                      $   581            $   396           $   271
Net income for the year                                                       311                185               125
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31                                                    $   892            $   581           $   396
=======================================================================================================================
ACCUMULATED OTHER COMPREHENSIVE LOSS (cumulative foreign currency translation adjustment)
Balance at January 1                                                      $  (131)           $   (33)          $   (10)
Foreign currency translation adjustment                                      (212)               (98)              (23)
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31                                                    $  (343)           $  (131)          $   (33)
=======================================================================================================================
TREASURY STOCK
Balance at January 1 and December 31                                       $   --           $     (1)          $    (3)
-----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY                                                 $1,794             $1,481            $  721
-----------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income for the year                                                    $  311             $  185            $  125
Foreign currency translation adjustment                                      (212)               (98)              (23)
-----------------------------------------------------------------------------------------------------------------------
Comprehensive Income                                                       $   99             $   87            $  102
-----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
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 owning
and operating  electric  power  generation and  distribution  businesses in many
countries around the world.

     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.  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 to be 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 significant unrealized
gains or losses are recorded as a separate  component of  stockholders'  equity.
Interest and dividends on investments are reported in interest income. Gains and
losses on sales of investments  are recorded  using the specific  identification
method.  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).

     ACCOUNTS   RECEIVABLE  --  Accounts  receivable  include  a  provision  for
uncollectible  amounts of $59  million at  December  31,  1998  associated  with
receivables arising from the Company's  operations in the Dominican Republic and
Kazakhstan,  and $37 million at December 31, 1997  associated  with  receivables
arising from the Company's operations in Kazakhstan.

     INVENTORY --  Inventory,  valued at the lower of cost or market  (first in,
first out method),  consists of coal, fuel oil, raw materials,  spare parts, and
supplies. Inventory consists of the following (in millions):
---------------------------------------------
DECEMBER 31               1998       1997
---------------------------------------------
Coal, fuel oil and
  other raw materials    $ 63      $ 58
Spare parts, materials
  and supplies             56        37
---------------------------------------------
Total                    $119      $ 95
---------------------------------------------
PROPERTY, PLANT AND EQUIPMENT -- Property,  plant and equipment,  including
improvements,  is stated at cost.  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  generation and distribution assets and are depreciated
over the useful life of the related components.

     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  generation  and  distribution  assets when the assets are ready for
their intended use.  Interest  capitalized  during  development and construction
totaled  $79  million,  $67  million  and $27  million  in 1998,  1997 and 1996,
respectively.

     INTANGIBLE  ASSETS  --  Goodwill  and  electricity  sales  concessions  and
contracts are amortized on a straight-line basis over their estimated periods of
benefit which range from 15 to 40 years.  Intangible assets at December 31, 1998
and 1997 are  shown  net of  accumulated  amortization  of $39  million  and $13
million, respectively.

     LONG-LIVED  ASSETS  --  The  Company  reviews  its  long-lived  assets  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amounts of such assets may not be recoverable.

     DEFERRED  FINANCING  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  financing  costs are shown net of
accumulated  amortization of $70 million and $52 million as of December 31, 1998
and 1997, respectively.

     PROJECT   DEVELOPMENT  COSTS  --  The  Company  capitalizes  the  costs  of
developing new projects after achieving certain project related milestones which
indicates that the project is probable.  These costs represent  amounts incurred
for professional services,  salaries, permits, options, capitalized interest and
other related direct costs.  These costs are included in 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
government approvals, siting, financing,  construction,  permitting and contract
compliance.  Certain  reimbursable costs related to a project were classified as
other assets at December 31, 1997 and were recovered in 1998.

     INCOME  TAXES -- The Company  follows  Statement  of  Financial  Accounting
Standards  (SFAS) No.  109,  Accounting  for Income  Taxes.  Under the asset and
liability  method of SFAS No.  109,  deferred  tax  assets and  liabilities  are
recognized for the future tax consequences  attributable to differences  between
the financial  statement carrying amounts of the existing assets and liabilities
and their respective income tax bases.

     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  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.  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 accumulated other  comprehensive loss in the
stockholders' equity section of the balance sheet. For subsidiaries operating in
highly  inflationary  economies,  the  U.S.  Dollar  is  considered  to  be  the
functional   currency,   and  transaction  gains  and  losses  are  included  in
determining  net  income.  Gains  and  losses  that  arise  from  exchange  rate
fluctuations on transactions denominated in a currency other than the functional
currency,  except those that are hedged, are included in determining net income.
Foreign  currency  gains  and  losses  that  will be  recovered  through  tariff
adjustments as provided for in power sales contracts are deferred and recognized
as they are recovered under contract terms.

     During early 1999, the Brazilian Real experienced a significant devaluation
relative to the U.S.  Dollar,  declining from 1.21 Brazilian Reais to the Dollar
at  December  31,  1998 to 1.79 Reais to the Dollar at  February  3, 1999.  This
devaluation will likely result in significant  foreign currency  translation and
transaction losses for the Company in 1999.

     DEFINED  BENEFIT  PLANS -- In  1998,  the  Company  adopted  SFAS No.  132,
Employers'  Disclosures about Pensions and Other Retirement  Benefits.  SFAS No.
132 revises disclosures about pension and other postretirement  benefit plans by
providing  guidance  for a standard  practical  disclosure  format.  It does not
change the measurement or recognition of costs relating to these plans.

     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.  Electricity  distribution
revenues are  recognized  when power is provided.  Most of the  Company's  power
plants rely primarily on one power sales contract with a single customer for the
majority of revenues.  There were no single  customers  which  accounted  for at
least 10% of revenues in 1998,  three customers  accounted for 14%, 12%, and 10%
of revenues in 1997 and five customers  accounted for 20%, 16%, 16%, 11% and 10%
of revenues in 1996. The prolonged  failure of any of these customers to fulfill
contractual  obligations  or make  required  payments  could have a  substantial
negative  impact on AES's revenues and profits.  The Company does not anticipate
non-performance by the customers under these contracts.

     HEDGING   ARRANGEMENTS  --  The  Company  enters  into  various  derivative
transactions in order to hedge its exposure to certain market risks. The Company
currently has  outstanding  interest rate swap, cap and floor  agreements  which
hedge against  interest rate exposure on floating rate project  financing  debt.
These  transactions,  which are classified as other than trading,  are accounted
for as hedges,  and interest is expensed or capitalized,  as appropriate,  using
effective interest rates. Any fees are amortized as yield adjustments.

     NET INCOME PER SHARE -- Basic and diluted net income per share are based on
the weighted average number of shares of common stock and potential common stock
outstanding during the period, after giving effect to stock splits (see Note 8).
Potential common stock, for purposes of determining  diluted earnings per share,
includes the effects of dilutive stock options, warrants,  deferred compensation
arrangements  and convertible  securities.  The effect of such potential  common
stock is computed using the treasury stock method or the if-converted method, as
applicable.

     COMPREHENSIVE  INCOME  -- In  1998,  the  Company  adopted  SFAS  No.  130,
Reporting Comprehensive Income. SFAS No. 130 establishes rules for the reporting
of comprehensive income and its components. Comprehensive income consists of net
income and foreign  currency  translation  adjustments  and is  presented in the
Consolidated  Statements of Changes in Stockholders' Equity for all periods. The
adoption of SFAS No. 130 had no impact on the  previously  reported  balances of
stockholders' equity.

     USE OF ESTIMATES -- The  preparation of financial  statements in conformity
with  generally  accepted  accounting  principles  requires  the Company to make
estimates and assumptions that affect reported
amounts of assets and  liabilities  and  disclosures  of  contingent  assets and
liabilities  at the date of the  financial  statements,  as well as the reported
amounts of revenues and expenses  during the reporting  period.  Actual  results
could differ from those estimates.

     RECLASSIFICATIONS  --  Certain  reclassifications  have  been made to prior
period  amounts to conform  with the 1998  presentation.  In 1998,  the  Company
changed its method of reporting earnings from its equity affiliates to a pre-tax
basis. The Company's share of the investee's  income taxes is recorded in income
tax expense. Amounts for 1997 and 1996 have been reclassified to conform to this
presentation (see Note 4).

2. ACQUISITIONS

     In January 1998, a subsidiary of AES acquired an additional  5.6% ownership
interest  in the  former  Companhia  Centro-Oeste  de  Distribuicao  de  Energia
Electrica (Sul), an electric  distribution company in the state of Rio Grande do
Sul,  Brazil.  Previously,  in October  1997,  AES had  acquired  90% of Sul for
approximately $1.4 billion.  The additional  investment in 1998 of approximately
$116 million increased AES's ownership  interest in Sul to 95.6%.  Approximately
$884  million  of the  acquisition  cost  represents  the  value  of the 60 year
electricity  sales  concession  granted to Sul, which is being amortized over 40
years.  Included  in current  liabilities  at  December  31, 1997 is $34 million
associated with severance costs related to the acquisition.

     Also in January  1998, a subsidiary of AES sold  approximately  3.7% of its
equity investment in Companhia Energetica de Minas Gerais (Cemig), an integrated
electric  utility serving the State of Minas Gerais in Brazil for  approximately
$102  million.  Cemig owns  approximately  5,000 MW of  generating  capacity and
serves  approximately  4  million  customers.  In  June  1997,  AES,  through  a
consortium,  acquired, for approximately $1 billion, a 14.41% interest in Cemig.
This investment  represents a 33% voting interest.  Through the consortium,  the
Company has the ability to exercise significant influence over the operations of
Cemig and records the investment using the equity method. After the January 1998
sale of a portion of its equity  investment,  AES's net investment  represents a
9.4% ownership interest in Cemig.

     In February 1998, a subsidiary of the Company  acquired,  for approximately
$97  million,  80% of  Compania  de Luz  Electrica  de  Santa  Ana  (Clesa),  an
electricity  distribution  company in El Salvador,  and subsequently sold 16% of
its interest for approximately $15 million.  At December 31, 1998, the Company's
ownership  interest was 64%.  Approximately  $32 million of the acquisition cost
represents the value of the electricity sales concession granted to Clesa, which
has no expiration date, and is being amortized over 40 years.

     In April 1998, a subsidiary  of AES acquired for no  consideration  a 45 MW
hydroelectric  plant (Caracoles) from the government of the San Juan Province in
Argentina.  The project  represents  the operation,  under a 30 year  concession
agreement,  and  refurbishment,  of  the  hydroelectric  plant  as  well  as the
construction  of a new  230 MW  plant  (Punta  Negra)  at  the  same  site.  The
construction  of Punta  Negra will be funded with cash flows from  Caracoles  as
well as a contribution of approximately  $139 million from the government of San
Juan.  AES will  operate the Punta  Negra  facility  under a 30 year  concession
agreement, at which time the facility will revert to the government of San Juan.

     In May 1998, a subsidiary of AES acquired three natural gas-fired  electric
generating   stations   (Southland)   from   Southern   California   Edison  for
approximately  $786  million.  Approximately  $45 million of the purchase  price
represents goodwill and is being amortized over 40 years.

     In June 1998, a subsidiary  of AES  acquired  approximately  90% of Empresa
Distribuidora de La Plata S.A. (Edelap), an electric distribution company in the
province of Buenos Aires,  Argentina for approximately $355 million. In November
1998, the subsidiary  sold one-third of its 90% interest for  approximately  $61
million and a proportionate  percentage of related  project debt  (approximately
$64 million).  At December 31, 1998,  the Company's  ownership  interest is 60%.
Approximately  $129 million of the acquisition  cost represents the value of the
90 year electricity sales concession agreement, which is being amortized over 40
years.

     In late December 1998, a subsidiary of the Company  acquired a 49% share of
the Orissa Power Generation Corporation (OPGC) a state government-owned  company
in India, for approximately $144 million. The remaining interest is owned by the
Orissa state government.  OPGC owns and operates a 420 MW mine-mouth  coal-fired
power  station.  Also in late December,  the Company  acquired a 75% interest in
Telasi, the electricity  distribution  company of Tbilisi,  Republic of Georgia,
for  approximately  $26  million.  The  Company has not  recorded  any income or
earnings from these two acquisitions  during 1998 because it took over operating
control of both companies in January 1999.

     In January  1997,  the Company  acquired  an  additional  2.4%  interest in
Light-Servicos  de  Electricidade  S.A.  (Light),   a  publicly-held   Brazilian
corporation that operates as the concessionaire of an integrated  electric power
generation,  transmission and  distribution  system which serves Rio de Janeiro,
Brazil. In June 1996, AES and three other partners  participated in a consortium
which acquired a 50.44% controlling interest.  The additional investment in 1997
of  approximately  $82  million,  increased  AES's  holdings in Light to 13.75%.
Through the  consortium,  the  Company  has the ability to exercise  significant
influence  over the  operations  of Light and records the  investment  using the
equity method.

     In May 1997, AES completed its amalgamation  with AES China Generating Co.,
Ltd. (Chigen). As a result of the amalgamation, the Company issued approximately
5 million  shares of AES Common Stock,  valued at $157 million,  in exchange for
all of the out-
standing  Chigen  Class A  Common  Stock.  Approx  imately  $29  million  of the
transaction  cost represents  values assigned to power purchase  contracts which
are being  amortized  over their  respective  lives,  which  range from 16 to 25
years.

     Also in May 1997, a subsidiary of the Company  acquired 60% of two electric
distribution  companies sold as part of the Argentine  government  privatization
program. The companies purchased were Empresa Distribudora Energia Norte (Eden),
which  serves  the  northern  part of the Buenos  Aires  province,  and  Empresa
Distribudora Energia Sur (Edes), which serves the southern part of the province.
The Company,  together with its partner,  invested approximately $565 million to
acquire a 90% ownership interest in each company.  Approximately $204 million of
the  acquisition  cost  represents  the value of the 95 year  electricity  sales
concessions granted to Eden and Edes, and is being amortized over 40 years.

     In June 1997, AES acquired the international  assets of Destec Energy, Inc.
for approximately $439 million.  The purchase included five electric  generating
plants  in  construction  or  operation  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
(Kingston) (50%); a 405 MW gas-fired  combined cycle plant under construction in
Terneuzen,  Netherlands  (Elsta) (50%); a 140 MW gas-fired simple cycle plant in
Cornwall,  England (Indian Queens) (100%); a 235 MW oil-fired simple cycle plant
in  Santo  Domingo,  Dominican  Republic  (Los  Mina)  (100%);  and a  1,600  MW
coal-fired plant in Victoria,  Australia  (Hazelwood) (20%).  Approximately $172
million of the acquisition cost represents the value of various  contracts which
are being  amortized over the respective  lives which range from 14 to 34 years,
and  a  $67  million   liability  was  accrued  related  to  the  completion  of
construction at Elsta. Construction at Elsta was completed in September 1998.

     The Hazelwood  investment  was  classified as held for sale at December 31,
1997,  and was  subsequently  sold in February  1998.  The Company  recognized a
foreign  currency  transaction  loss  of $5  million  in  1997  related  to this
investment.

     In October  1997, a subsidiary  of the Company  acquired an 85% interest in
two  hydro-electric  stations  (GES) and four combined  heat and power  stations
(TETS) in eastern  Kazakhstan  (Altai).  Altai has a total electric  capacity of
1,384 MW with an additional  equivalent thermal capacity of approximately  1,000
MW.  The  purchase  price  was  approximately  $24  million  for the 20 year GES
concession and the TETS shares.

     These acquisitions were all accounted for as purchases.  The purchase price
allocations for Clesa, Caracoles,  Southland,  Edelap, Telasi and OPGC have been
completed  on  a  preliminary  basis,  subject  to  adjustments  resulting  from
additional facts that may come to light when the engineering, environmental, and
legal  analyses are completed  during the  respective  allocation  periods.  The
accompanying  financial  statements  include the operating results of Clesa from
February 1998,  Caracoles from April 1998,  Southland from May 1998, Edelap from
June 1998, Eden and Edes from May 1997, equity in earnings of Cemig and Kingston
from June 1997,  and the  operating  results of Los Mina and Indian  Queens from
June 1997, and Sul and Altai from October 1997.

     The table below presents supplemental  unaudited proforma operating results
as if all  of the  acquisitions  had  occurred  at the  beginning  of  1997  (in
millions, except per share amounts):
---------------------------------------
For the year ended      1998     1997
---------------------------------------
Revenues              $2,498  $ 2,100
Income before
  extraordinary item     304      151
Net income               308      148
Basic earnings
  per share          $  1.74  $  0.89
Diluted earnings
  per share          $  1.68  $  0.87
---------------------------------------
The proforma  results are based upon  assumptions  and estimates  which the
Company  believes  are  reasonable.  The  proforma  results do not purport to be
indicative  of the  results  that  actually  would  have been  obtained  had the
acquisitions  occurred  on  January  1,  1997,  nor are  they  intended  to be a
projection of future results.

     In January  1999,  a subsidiary  of the Company  acquired a 49% interest in
three  hydro-electric  generating  facilities  in Panama for  approximately  $91
million.
3. INVESTMENTS
The  short-term  investments  and debt service  reserves and other deposits were
invested as follows (in millions):
================================================================================
DECEMBER 31                                          1998                1997
================================================================================
RESTRICTED CASH AND CASH EQUIVALENTS (1)           $  108              $  130
--------------------------------------------------------------------------------
HELD-TO-MATURITY
U.S. treasury and government agency securities         15                  37
Foreign certificates of deposit                         1                  95
Commercial paper                                       95                  66
--------------------------------------------------------------------------------
Subtotal                                              111                 198
--------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. treasury and government agency securities          -                  15
Certificates of deposit                                 -                   2
Commercial paper                                       21                  15
Floating rate notes                                     -                   3
--------------------------------------------------------------------------------
Subtotal                                               21                  35
--------------------------------------------------------------------------------
TOTAL                                              $  240              $  363
================================================================================
(1) amounts  required  to be  maintained  in cash  in  accordance  with  certain
    covenants of various project financing agreements.

At December 31, 1998 and 1997,  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,  1998 and 1997  classified  as
held-to-maturity and available-for-sale were approximately the same.

Short-term  investments  classified as held-to-maturity  and  available-for-sale
were $16 million and $15 million,  respectively,  at December 31, 1998, and $111
million and $16 million,  respectively,  at December 31, 1997.  Also included in
short-term  investments at December 31, 1998 is restricted cash of approximately
$4 million.  There was no restricted cash in short-term  investments at December
31, 1997.

4. INVESTMENTS IN AND ADVANCES TO AFFILIATES

The Company is a party to joint venture/consortium  agreements through which the
Company  has  equity  investments  in  several  operating  companies.  The joint
venture/consortium  parties generally share operational control of the investee.
The  agreements  prescribe  ownership  and voting  percentages  as well as other
matters.  The Company records its share of earnings from its equity investees on
a pre-tax basis. The Company's share of the investee's  income taxes is recorded
in income tax expense.  The  following  table  represents  summarized  financial
information (in millions) for equity method affiliates on a combined 100% basis.
Amounts  presented  for 1998  include the accounts of  Northern/AES  Energy (45%
owned U.S.  affiliate) and for both 1998 and 1997 include the accounts of NIGEN,
Ltd. (NIGEN) (47% owned UK affiliate),  Medway Power Ltd.  (Medway)(25% owned UK
affiliate),  Light (13.75%  owned  Brazilian  affiliate),  affiliates of Chigen,
Kingston  (50%  owned  Canadian   affiliate),   Elsta  (50%  owned   Netherlands
affiliate),  and Cemig (9.4% and 13.1%,  in 1998 and 1997,  respectively,  owned
Brazilian affiliate).  Amounts presented for 1996 include the accounts of NIGEN,
Medway, Light (11.35% owned Brazilian affiliate), and affiliates of Chigen.
================================================================================
AS OF AND FOR THE YEARS ENDED DECEMBER 31          1998       1997     1996
================================================================================
Revenues                                          $ 8,091  $ 3,991   $ 1,959 
Operating income                                    2,079      984       497 
Net income                                          1,146      670       383 
Current  assets                                     2,712    1,698       889  
Noncurrent  assets                                 19,025   14,800     4,914
Current  liabilities                                4,809    1,809       863 
Noncurrent  liabilities                             7,356    4,752     2,108
Stockholders' equity                                9,572    9,937     2,832
================================================================================
The  Company's  after tax share of  undistributed  earnings  of  affiliates
included in  consolidated  retained  earnings was $50 million and $57 million at
December 31, 1998 and 1997,  respectively.  The Company  charged and  recognized
construction  revenues,   management  fees  and  interest  on  advances  to  its
affiliates which aggregated $19 million, $42 million, and $9 million for each of
the years ended December 31, 1998, 1997 and 1996, respectively.
5. DEBT
PROJECT  FINANCING DEBT -- Project  financing debt at December 31, 1998 and 1997
consisted of the following (in millions):
======================================================================================
                                                INTEREST      FINAL        DECEMBER 31
                                                 RATE(1)     MATURITY    1998     1997
======================================================================================
SENIOR DEBT - VARIABLE RATE
Notes payable to banks                              7.3%       2017    $3,011   $1,830
Commercial paper                                    6.9%       2007       291      598
Debt to (or guaranteed by) multilateral                                               
  or export credit agencies                         5.8%       2010       452      429
SENIOR DEBT - FIXED RATE                                                              
Notes payable to banks                             10.0%       2009       689      623
Capital leases                                      7.6%       2022       135      143
Tax-exempt bonds                                    7.4%       2019        74       74
Chigen bonds                                       10.1%       2006       162      180
Debt to (or guaranteed by) multilateral                                               
  or export credit agencies                         6.5%       2008       135      133
SUBORDINATED DEBT - VARIABLE AND FIXED RATE        12.4%       2014        53       75
--------------------------------------------------------------------------------------
SUBTOTAL                                                                5,002    4,085
Less current maturities                                                (1,405)    (596)
--------------------------------------------------------------------------------------
TOTAL                                                                  $3,597   $3,489
======================================================================================
(1) weighted average interest rate at December 31, 1998

     Project  financing  debt  borrowings  are primarily  collateralized  by the
capital  stock of the relevant  subsidiary  and in certain  cases,  the physical
assets of and all significant agreements associated with such business.

     The  Company  has  interest  rate  swap  and  forward  interest  rate  swap
agreements  in an  aggregate  notional  principal  amount of $1,366  million  at
December 31, 1998. The swap agreements  effectively change the variable interest
rates on the  portion of the debt  covered by the  notional  amounts to weighted
average fixed rates ranging from  approximately  7.4% to 12.1%.  The  agreements
expire at various dates from 1999 through  2014. In the event of  nonperformance
by the  counterparties,  the Company may be exposed to increased interest rates,
however,  the Company does not anticipate nonper formance by the counterparties,
which  are  multinational   financial   institutions.   At  December  31,  1998,
subsidiaries  of the Company have interest rate cap, floor and forward  interest
rate cap agreements at various rates with remaining terms ranging from one to 18
years in an aggregate notional amount of $1,365 million.

     The commercial paper  borrowings are supported by an irrevocable  letter of
credit issued by a U.S. financial institution. In the event of nonperformance or
credit deterioration of the institution,  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.  

     At  December  31,  1998,  the  current  portion of project  financing  debt
includes $1,053 million of short-term loans incurred to finance the acquisitions
of Sul ($729  million) in Brazil,  and Eden,  Edes and Edelap ($324  million) in
Argentina.  The Company's intention is to replace some or all of such loans with
long-term project financing.
OTHER  NOTES  PAYABLE -- Other  notes  payable  at  December  31,  1998 and 1997
consisted of the following (in millions):
=======================================================================================================================
                                               Interest        Final          First Call
                                               Rate (1)       Maturity           Date            1998           1997
=======================================================================================================================
Corporate revolving bank loan (1)                 7.21%         2000                --          $  233       $     27
Senior notes                                      8.00%         2008              2000             200             --
Senior subordinated notes                        10.25%         2006              2001             250            250
Senior subordinated notes                         8.38%         2007              2002             325            325
Senior subordinated notes                         8.50%         2007              2002             375            375
Senior subordinated debentures                    8.88%         2027              2004             125            125
Convertible junior subordinated notes             4.50%         2005              2001             150             __
Unamortized discounts                                                                               (6)            (6)
-----------------------------------------------------------------------------------------------------------------------
SUBTOTAL                                                                                         1,652          1,096
Less current maturities                                                                             (8)            --
-----------------------------------------------------------------------------------------------------------------------
TOTAL                                                                                           $1,644         $1,096
=======================================================================================================================
(1) weighted average interest  rate at December 31, 1998 on floating  rate loan.

     Under  the  terms of the $600  million  corporate  revolving  bank loan and
letter of credit  facility  (Revolver),  the  Company  must  reduce  its  direct
borrowings to $225 million for 30 consecutive days annually to obtain additional
loans.  Commitment  fees on the unused portion at December 31, 1998 are .38% per
annum,  and as of that date $173 million was  available.  The  Company's  senior
subordinated notes are general unsecured obligations of the Company.

     The Company's 9.75% senior  subordinated  notes due 2000 were refinanced in
August  1997.  As a result,  the Company  recorded an  extraordinary  loss of $3
million, which is net of a $2 million tax benefit.

     Chigen bonds in the amount of $18 million,  were  redeemed in 1998 prior to
maturity.  As a result,  the Company has  recorded an  extraordinary  gain of $4
million, net of income tax of $2 million.

     FUTURE MATURITIES OF DEBT -- Scheduled maturities of total debt at December
31, 1998 are (in millions):

=====================================
  1999                         $1,413
  2000                            566
  2001                            358
  2002                            282
  2003                            268
  Thereafter                    3,767
-------------------------------------
  TOTAL                        $6,654
=====================================

     COVENANTS  -- The  terms  of the  Company's  Revolver,  senior  and  junior
subordinated  notes  and  project  financing  debt  agreements  contain  certain
restrictive covenants. 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 stockholders.

     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, 1998,  approximately $57 million was available
under project loan documents for distribution by U.S. subsidiaries.
6. COMMITMENTS AND CONTINGENCIES

OPERATING  LEASES-- As of December  31, 1998,  the Company and its  consolidated
subsidiaries  were obligated under long-term  non-cancelable  operating  leases,
primarily for office rental and site leases. Rental expense for operating leases
was $4 million,  $6 million and $4 million in the years ended December 31, 1998,
1997 and 1996,  respectively.  The future minimum lease  commitments under these
leases  are $4  million  for 1999 and 2000,  $3  million  for 2001 and 2002,  $6
million for 2003, and a total of $71 million for the years thereafter.

     CONTRACTS  -- A subsidiary  of the Company has entered  into  "take-or-pay"
contracts for the purchase of electricity  with a term of up to thirteen  years.
Purchases in 1998 were approximately $214 million.  The future commitments under
these  contracts are $228 million for 1999,  $229 million for 2000, $237 million
for 2001,  $253  million for 2002,  $231  million for 2003 and a total of $1,229
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 1 to 28 years.
One  subsidiary  has entered into a  "take-or-pay"  contract for the purchase of
natural  gas.  Purchases  in 1998 were  approximately  $12  million.  The future
commitments  under this  contract  are $27 million for 1999  through  2002,  $28
million for 2003 and $136 million thereafter.

     In December  1998,  the Company  entered into an agreement  with one of its
electricity  customers  for one of its plants  whereby the customer will buy out
the  remaining  term of the  contract.  The  agreement is subject to  regulatory
approval.  Related  to this  agreement,  the  Company  has either  entered  into
agreements  or is  negotiating  agreements  to  terminate  its  other  long-term
commitments related to the operation of this plant.

     ACQUISITIONS  -- In August 1998,  AES won a bid to acquire six  coal-fired,
electric generating stations from NGE Generation, Inc., an affiliate of New York
State Electric and Gas Corporation,  for approximately $950 million. In November
1998,  AES  agreed to  acquire  the  outstanding  shares of  Cilcorp,  Inc.,  an
integrated  distribution company in Illinois for approximately $885 million. The
Company  anticipates  completion of both of these  acquisitions in 1999, pending
regulatory and other approvals.

     ENVIRONMENTAL  -- The  Company  reviews  its  obligations  as it relates to
compliance with environmental laws,  including site restoration and remediation.
Because  of the  uncertainties  associated  with  environmental  assessment  and
remediation  activities,  future costs of  compliance  or  remediation  could be
higher or lower than the amount currently accrued.  Based on currently available
information,  the Company does not believe that any costs  incurred in excess of
those currently  accrued will have a material effect on the financial  condition
of the Company.

     TRADING  ACTIVITY  COMMITMENTS  -- A  subsidiary  and an  affiliate  of the
Company participate in the trading of electricity forward contracts with various
counterparties  and as a result,  the  Company is exposed to the risk of trading
losses by its  subsidiary or affiliate,  and the risk of  nonperformance  by its
subsidiary,  affiliate  or  counterparties.  The  Company has  provided  limited
guarantees  aggregating $38 million which are included in the amounts  disclosed
below.  The  Company  does  not  anticipate  nonperformance  by its  subsidiary,
affiliate or the counterparties.

     GUARANTEES  --  In  connection  with  certain  of  its  project  financing,
acquisition 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  those  collateralized  by letter of credit  obligations
discussed  below,  were  limited as of December  31,  1998,  by the terms of the
agreements,  to an aggregate of approximately $399 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, 1998. In addition,  the
Company  has  commitments  to  fund  its  equity  in  projects  currently  under
development or in construction.  At December 31, 1998 such commitments to invest
amounted to approximately $19 million.

     LETTERS OF CREDIT -- At December 31, 1998,  the Company had $194 million in
letters of credit  outstanding  under its  Revolver  which  operate to guarantee
performance  relating to certain project  development  activities and subsidiary
operations.  The Company pays a letter of credit fee ranging from 0.75% to 1.50%
on the outstanding  amounts. In addition,  the Company had $29 million in surety
bonds outstanding at December 31, 1998.

     LITIGATION -- The Company is involved in certain legal  proceedings  in the
normal  course of  business.  It is the opinion of the Company  that none of the
pending  litigation  will  have a  material  adverse  effect on its  results  of
operations, financial position, or cash flows.

7. COMPANY OBLIGATED  MANDATORILY  REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
   TRUSTS  
During 1997, two wholly-owned special purpose business trusts (individually, AES
Trust I and AES Trust II and  collectively,  the Trusts) issued Term Convertible
Securities (Tecons). On March 31, AES Trust I issued 5 million of $2.6875 Tecons
(liquidation  value $50) for total  proceeds of $250  million  and  concurrently
purchased $250 million of 5.375% junior subordinated  convertible debentures due
2027 of AES  (individually the 5.375%  Debentures).  On October 29, AES Trust II
issued 6 million of $2.75 Tecons  (liquidation  value $50) for total proceeds of
$300 million and concurrently purchased $300 million of 5.5% junior subordinated
convertible  debentures due 2012 of AES  (individually  the 5.5%  Debentures and
collectively with the 5.375% Debentures the Junior Debentures).  The sole assets
of AES Trust I
are the  5.375%  Debentures  and the sole  assets  of AES  Trust II are the 5.5%
Debentures.  The  obligations of the Trusts,  as provided under the terms of the
Tecons, are fully and unconditionally guaranteed by AES.

     Dividends  on the Tecons are payable  quarterly at an annual rate of 5.375%
by AES Trust I and 5.5% for AES Trust II. The Trusts are each permitted to defer
payment of dividends for up to 20  consecutive  quarters,  provided that AES has
exercised its right to defer interest  payments under the  corresponding  Junior
Debentures.   During  such  deferral  periods,  dividends  on  the  Tecons  will
accumulate  quarterly  and  accrue  interest  and  AES may  not  declare  or pay
dividends on its common stock.  The Tecons are convertible into the common stock
of AES at each  holder's  option  prior to March  31,  2027 for AES  Trust I and
September  30,  2012 for AES  Trust II at the rate of 1.3812  and .8914  shares,
respectively,  representing a conversion  price  equivalent to $36.20 and $56.09
per share respectively.

     AES, at its option,  can redeem the 5.375%  Debentures after March 31, 2000
which would result in the required  redemption of the Tecons issued by AES Trust
I, for  $51.68  per Tecon,  reduced  annually  by $0.336 to a minimum of $50 per
Tecon and can redeem the 5.5%  Debentures  after  September 30, 2000 which would
result in the  required  redemption  of the  Tecons  issued by AES Trust II, for
$51.72 per Tecon, reduced annually by $0.344 to a minimum of $50 per Tecon.

    Interest expense for the year ended December 31, 1998 and 1997 includes $ 14
million and $10 million,  respectively  related to the dividends  accrued on the
Tecons of AES Trust I and $17  million  and $3 million  related to AES Trust II,
respectively.

8. STOCKHOLDERS' EQUITY
SALE OF STOCK -- In August 1998,  the Company sold 4.3 million  shares of common
stock at $44.625 per share. Net proceeds from the offering were $184 million.

     STOCK SPLIT AND STOCK  DIVIDEND -- 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  August  28,  1997.  Accordingly,  all
outstanding share, per share and stock option data in all periods presented have
been restated to reflect the split.

     STOCK   CONVERSION  --  On  July  30,  1996,  $49  million  of  convertible
debentures,  net of conversion  costs, were converted into 3.8 million shares of
AES common stock at a conversion price of $13.08 per share.

     STOCK  OPTIONS AND WARRANTS -- The Company has granted  options to purchase
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, 1998,  there were  approximately  3.4 million  shares  reserved for
future grants under the plans.
A summary of the option activity follows (in thousands of shares):
========================================================================================================================
FOR THE YEARS ENDED DECEMBER 31             1998                          1997                          1996
========================================================================================================================
                                            WEIGHTED-AVERAGE             WEIGHTED-AVERAGE               WEIGHTED-AVERAGE
                                     SHARES  EXERCISE PRICE        SHARES EXERCISE PRICE         SHARES  EXERCISE PRICE
------------------------------------------------------------------------------------------------------------------------
Outstanding - beginning of year      8,896       $13.29            8,020      $ 9.30             8,126      $ 7.28
Exercised during the year           (1,043)        8.60             (941)       7.78              (960)       5.35
Forfeitures during the year            (10)       31.99              (58)      11.23              (432)      10.28
Granted during the year                 83(1)     34.36              999       34.42             1,286       19.39
Conversion of Chigen options            --           --              876       19.67                --          --
------------------------------------------------------------------------------------------------------------------------
Outstanding - end of year            7,926       $14.10            8,896      $13.29             8,020      $ 9.30
========================================================================================================================
Eligible for exercise - end of year  6,855       $12.54            6,163     $  9.37             4,264      $ 6.43
========================================================================================================================
(1) Additional stock options for 1998 performance were granted in February 1999.
    The Company issued approximately one million options to purchase shares at a
    price of $34.25 per share.

The following table summarizes  information  about stock options  outstanding at
December 31, 1998 (in thousands of shares):
==================================================================================================================
                                            OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
==================================================================================================================
                                              WEIGHTED-AVERAGE    WEIGHTED-                           WEIGHTED-
  RANGE OF                            TOTAL    REMAINING LIFE      AVERAGE              TOTAL          AVERAGE
EXERCISE PRICES                   OUTSTANDING    (IN YEARS)    EXERCISE PRICE         EXERCISABLE  EXERCISE PRICE
-----------------------------------------------------------------------------------------------------------------
$.78   - $3.24                      1,400            1.8          $  2.97               1,400         $  2.97
$3.25  - $9.88                      1,849            5.1             8.88               1,475            8.76
$9.89  - $14.40                     2,045            6.3            10.42               2,029           10.42
$14.41 - $22.85                     1,540            7.3            20.11               1,408           20.30
$22.86 - $58.00                     1,092            8.3            35.65                 543           35.22
-----------------------------------------------------------------------------------------------------------------
TOTAL                               7,926                         $ 14.10               6,855         $ 12.54
-----------------------------------------------------------------------------------------------------------------
The Company accounts for its stock-based  compensation  plans under APB No.
25, and has adopted SFAS No. 123, Accounting For Stock-Based  Compensation,  for
disclosure  purposes.  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.  For SFAS No. 123  disclosure  purposes,  the
weighted  average 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:

==================================================
                                1998   1997  1996
==================================================

Interest rate (risk-free)       4.7%  5.9%  6.5%
Volatility                       47%   37%   28%
==================================================

     Using these assumptions,  an expected option life of 7 years and a dividend
yield of zero, the weighted  average fair value of each stock option granted was
$19.02,  $17.86 and $8.81, for the years ended December 31, 1998, 1997 and 1996,
respectively.

    Had  compensation  expense been determined  under the provisions of SFAS No.
123,  utilizing  the  assumptions  detailed  in  the  preceding  paragraph,  the
Company's  net income and  earnings  per share for the years ended  December 31,
1998,  1997 and 1996 would have been reduced to the  following pro forma amounts
(in millions):
================================================================================
FOR THE YEARS ENDED DECEMBER 31                        1998     1997     1996
================================================================================
NET INCOME:
As reported                                            $ 311    $185      $ 125
Pro forma                                                301     174        123
BASIC EARNINGS PER SHARE:
As Reported                                            $1.75    $1.11     $0.83
Pro forma                                               1.70     1.04      0.81
DILUTED EARNINGS PER SHARE:
As reported                                            $1.69    $1.09     $0.80
Pro forma                                               1.64     1.00      0.78
================================================================================
The disclosures of such amounts and assumptions are not intended to forecast
any possible  future  appreciation  of the Company's stock or change in dividend
policy.

     In  addition  to the  options,  the  Company  has  outstanding  warrants to
purchase  up to 1.3  million  shares of its  common  stock at  $14.72  per share
through July 2000.

     CHIGEN -- In May 1997, the Company acquired all of the outstanding  Class A
shares of Chigen by  amalgamating  Chigen with a wholly-owned  subsidiary of the
Company.  As a result of this  transaction,  the Company issued  approximately 5
million  shares of its common stock.  As part of the  amalgamation,  the Company
also  converted the  outstanding  options of the Chigen stock option plan to AES
stock options at the ratio of .29 to 1.

9. EARNINGS PER SHARE
The following table presents a reconciliation of the numerators and denominators
of the basic and  diluted  earnings  per share  computations  for income  before
extraordinary  item.  In the table below Income  represents  the  numerator  (in
millions) and Shares represent the denominator (in thousands):
=======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31              1998                            1997                         1996
=======================================================================================================================
                                                      $ PER                         $ PER                       $ PER
                                      INCOME SHARES   SHARE         INCOME  SHARES  SHARE         INCOME SHARES SHARE
-----------------------------------------------------------------------------------------------------------------------
BASIC EPS
Income before extraordinary item       $307   177.5   $1.73          $188    166.6  $1.13          $125   151.5 $0.83
EFFECT OF DILUTIVE SECURITIES
Stock options and warrants               --     4.3                    --      4.4                   --     2.7
Stock units allocated to deferred
  compensation plans                     --     0.3                    --      0.5                   --     0.5
Tecons and other convertible debt,
  net of tax                              9     6.9                    10      6.3                    1     2.5
-----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE             $316   189.0   $1.67          $198    177.8  $1.11          $126   157.2 $0.80
=======================================================================================================================
10. INCOME TAXES

INCOME TAX PROVISION -- The provision for income taxes consists of the following
(in millions):
================================================================================
FOR THE YEARS ENDED DECEMBER 31        1998              1997            1996
================================================================================
Federal
  Current                             $  (9)            $   7            $ 19
  Deferred                               61                22              27
State
  Current                                 3                19              12
  Deferred                               (5)               (6)             (2)
Foreign
  Current                                82                18              10
  Deferred                               13                17               8
--------------------------------------------------------------------------------
Total                                 $ 145              $ 77            $ 74
================================================================================
The  Company  records its share of  earnings  of its equity  investees  on a
pre-tax basis. The Company's share of the investee's income taxes is recorded in
income tax expense; amounts for prior years have been reclassified as such.

    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 (after minority interest) is as follows:
================================================================================
For the Years Ended December 31       1998              1997            1996
================================================================================
Statutory Federal tax rate              35%               35%             35%
Change in valuation allowance           --                (1)             (1)
State taxes, net of Federal tax benefit (1)                3               3
Taxes on foreign earnings               (1)               (7)             --
Other - net                             (1)               (1)             --
--------------------------------------------------------------------------------
Effective tax rate                      32%               29%             37%
================================================================================
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 in different  periods than
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.

    As of  December  31,  1998,  the Company  had  Federal  net  operating  loss
carryforwards  for tax purposes of approximately  $85 million expiring from 2008
through 2018,  Federal  investment tax credit  carryforwards for tax purposes of
approximately  $51 million  expiring  in years 2002  through  2006,  and Federal
alternative  minimum tax credits of approximately $44 million which carryforward
without  expiration.  As of  December  31,  1998,  the  Company  had foreign net
operating  loss  carryforwards  of  approximately  $100 million  which expire at
various  times  beginning  in  2001,  and  some of  which  carryforward  without
expiration.  The  Company  had  state net  operating  loss  carryforwards  as of
December 31, 1998 of  approximately  $215 million expiring in years 1999 through
2018, and state tax credit  carryforwards of approximately  $11 million expiring
in years 2001 through  2008.  

     The valuation  allowance increased by $2 million during 1998 to $33 million
at December 31,  1998.  This  increase  was the result of increased  foreign net
operating loss  carryforwards,  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.
Deferred tax assets and liabilities are as follows (in millions):
================================================================================
FOR THE YEARS ENDED DECEMBER 31                      1998               1997
================================================================================
Differences between book and tax basis of
  property and total deferred tax liability          $ 469              $ 476
--------------------------------------------------------------------------------
Operating loss carryforwards                           (69)               (75)
Bad debt and other book provisions                     (48)               (47)
Retirement costs                                       (26)               (31)
Tax credit carryforwards                              (107)              (104)
Other deductible temporary differences                 (55)               (24)
--------------------------------------------------------------------------------
Total gross deferred tax asset                        (305)              (281)
Less: valuation allowance                               33                 31
--------------------------------------------------------------------------------
Total net deferred tax asset                          (272)              (250)
--------------------------------------------------------------------------------
Net deferred tax liability                           $ 197              $ 226
================================================================================
Undistributed  earnings  of  certain  foreign  affiliates  aggregated  $257
million on  December  31,  1998.  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 such  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.  A
deferred tax asset of $35 million has been  recorded as of December 31, 1998 for
the cumulative effects of certain foreign currency translation losses.

    Income from  continuing  operations  before  income taxes and  extraordinary
items consisted of the following:
================================================================================
FOR THE YEARS ENDED DECEMBER 31             1998           1997           1996
================================================================================
United States                               $211           $199           $175
Foreign                                      241             66             24
--------------------------------------------------------------------------------
Total                                       $452           $265           $199
================================================================================
11. PROFIT SHARING AND DEFERRED 
    COMPENSATION PLANS

PROFIT  SHARING AND STOCK  OWNERSHIP  PLANS -- The Company  sponsors  two profit
sharing and stock ownership  plans,  qualified under section 401 of the Internal
Revenue Code, which are available to eligible AES people.  The plans provide 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 plans were  approximately  $5 million  for the years ended
December 31, 1998 and 1997 and $4 million for the year ended December 31, 1996.

     DEFERRED COMPENSATION PLANS -- The Company sponsors 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 change of control of the Company (as defined
in the plan document).

     In  addition,   the  Company  sponsors  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  plans.  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 contributions 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.

     The Company also sponsors a supplemental  retirement plan covering  certain
highly-compensated  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.

     DEFINED BENEFIT PLANS -- Two of the Company's subsidiaries,  Sul and Clesa,
have  defined  benefit  pension  plans  covering   substantially  all  of  their
respective  employees.  Pension benefits are based on years of credited service,
age of the participant and average earnings.  Sul's plan assets are comprised of
Brazilian government  securities and bonds, stocks of publicly-traded  Brazilian
companies and real estate holdings. Clesa's pension plan is unfunded.
Significant   assumptions  used  in  the  calculation  of  pension  expense  and
obligation are as follows:
================================================================================
                                                          1998          1997(1)
                                                       Sul   Clesa
================================================================================
Discount rate                                           6%     11%        6%
Rate of compensation increase                           2%      7%        2%
Long-term rate of return on plan assets                 6%      --        6%
================================================================================
Net benefit  cost for the year ended  December  31, 1998 and the two months
ended December 31, 1997 (subsequent to the date of the Sul acquisition) includes
the following components (in millions):
================================================================================
December 31                                           1998              1997(1)
================================================================================
Service cost                                           $ 2              $ .3
Interest cost on projected benefit obligation            3                .1
Expected return on plan assets                          (1)               .3
Recognized actuarial gain                               --                .1
--------------------------------------------------------------------------------
Net benefit cost                                       $ 4              $ .8
================================================================================
The changes in the benefit  obligations  of the two plans combined for the years
ended December 31, 1998 and 1997 are as follows (in millions):
--------------------------------------------------------------------------------
                                                      1998              1997(1)
--------------------------------------------------------------------------------
CHANGES IN BENEFIT OBLIGATIONS:
Benefit obligation at beginning of year               $ 72               $--
Effect of foreign currency exchange rate change
   on beginning balance                                 (5)               --
Service cost                                             2                --
Interest cost                                            3                --
Plan participant contributions                          --                 1
Actuarial loss/(gain)                                    6                (2)
Acquisition                                              3                73
Benefits paid                                           (1)               --
--------------------------------------------------------------------------------
Benefit obligation as of December 31                  $ 80              $ 72
================================================================================
The  changes in the plan  assets of the two plans  combined  for the years ended
December 31, 1998 and 1997 are as follows (in millions):
================================================================================
                                                              1998     1997(1)
================================================================================
CHANGES IN PLAN ASSETS:
Fair value of plan assets at beginning of year              $ 31     $--
Effect of foreign currency exchange rate change
   on beginning balance                                       (2)     --
Actual return on plan assets                                   3       1
Acquisition                                                   --      28
Employer contribution                                          2       1
Plan participant contributions                                --       1
Benefits paid                                                 (1)     --
--------------------------------------------------------------------------------
Fair value of plan assets as of December 31                   33      31
================================================================================
The funded  status of the two plans  combined for the years ended as of December
31, 1998 and 1997 are as follows (in millions):
================================================================================
                                                               1998     1997(1)
================================================================================
Funded status                                                   (47)     (41)
Unrecognized net actuarial loss/(gain)                            5       (3)
--------------------------------------------------------------------------------
Accrued benefit obligation cost as of December 31             $ (42)   $ (44)
================================================================================
(1) Sul only, as Clesa was acquired during 1998 (see Note 2).

The Company is not  obligated  under any other  material  post-retirement  plans
other than the profit sharing,  deferred  compensation plans and defined benefit
plans described in this Note.
12. SEGMENTS
The Company considers its reportable segments to be generation and distribution.
Information  about the Company's  operations and assets by segment is as follows
(in millions):
========================================================================================================================
                                                                          PRE-TAX              INVESTMENT IN
                                           DEPRECIATION    OPERATING    EQUITY IN      TOTAL   AND ADVANCES  PROPERTY
                              REVENUES(1) AND AMORTIZATION    INCOME      EARNINGS     ASSETS  TO AFFILIATES  ADDITIONS
========================================================================================================================
Year Ended December 31, 1998
Generation                      $1,443        $  126        $  563         $  33      $ 5,682    $  495      $  369
Distribution                       939            70           218           199        4,687     1,438         148
Corporate and services              16            --           (48)           --          412        --          --
-----------------------------------------------------------------------------------------------------------------------
TOTAL                           $2,398        $  196        $  733        $  232      $10,781    $1,933      $  517
========================================================================================================================
YEAR ENDED DECEMBER 31, 1997
Generation                      $1,081         $  93        $  380         $  21      $ 4,404    $  315      $  483
Distribution                       280            21            24           105        4,269     1,548          28
Corporate and services              50            --           (36)           --          236        --          --
------------------------------------------------------------------------------------------------------------------------
TOTAL                           $1,411        $  114        $  368        $  126      $ 8,909    $1,863      $  511
========================================================================================================================
YEAR ENDED DECEMBER 31, 1996
Generation                      $  824         $  65        $  309         $  21      $ 3,002    $   82      $  506
Distribution                        --            --            --            28          433       409          --
Corporate and services              11            --           (31)           --          187        --          --
------------------------------------------------------------------------------------------------------------------------
TOTAL                           $  835         $  65        $  278         $  49      $ 3,622    $  491      $  506
========================================================================================================================
(1) Intersegment  revenues  for the years ended  December 31, 1998 and 1997 were
    $69 million and $34 million, respectively.

Information about the Company's  operations and long-lived assets by country are
as follows (in millions):
========================================================================================================================
                           US       ARGENTINA    BRAZIL      HUNGARY    PAKISTAN      OTHER   TOTAL FOREIGN    TOTAL
========================================================================================================================
REVENUES
1998                     $  655       $423        $478        $227        $213        $402       $1,743      $2,398
1997                        577        291          74         220          23         226          834       1,411
1996                        554        146          --          85          --          50          281         835
========================================================================================================================
LONG-LIVED ASSETS
1998                     $2,329     $1,017        $848        $154        $505        $980       $3,504      $5,833
1997                      1,424        587         875         172         490         726        2,850       4,274
1996                      1,281        203           6         202         393         182          986       2,267
========================================================================================================================
13. 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 financial liabilities,
and debt service reserves and other deposits, are estimated to be equal to their
reported carrying amounts.  The fair value of project financing debt,  excluding
capital  leases,  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. The fair value of interest
rate swap, cap and floor agreements is the estimated net amount that the Company
would  pay to  terminate  the  agreements  as of the  balance  sheet  date.  The
estimated fair values of the tax exempt bonds and Chigen bonds (both included in
project financing debt), certain of the other notes payable and Tecons are based
on quoted market prices.

The  estimated  fair  values  of the  Company's  debt and  derivative  financial
instruments as of December 31, 1998 and 1997 are as follows (in millions):
================================================================================
DECEMBER 31                             1998                         1997
                                CARRYING       FAIR         CARRYING       FAIR
                                  AMOUNT       VALUE         AMOUNT        VALUE
================================================================================
Project financing debt              $4,867    $4,847         $3,942       $3,953
Other notes payable                  1,652     1,687          1,096        1,116
Tecons                                 550       657            550          661
Interest rate swaps                     --       101             --           81
Interest rate caps and floors, net      --        (5)            --           --
================================================================================
The fair value estimates presented herein are based on pertinent  information as
of  December  31, 1998 and 1997.  The  Company is not aware of any factors  that
would  significantly  affect the estimated fair value amounts since December 31,
1998.

14. NEW ACCOUNTING PRONOUNCEMENTS

     In April 1998,  the  American  Institute of  Certified  Public  Accountants
(AICPA)  issued  Statement  of Position  (SOP) 98-5,  Reporting  on the Costs of
Start-Up  Activities.  SOP 98-5 provides guidance on the financial  reporting of
start-up and  organization  costs. The effect of adopting this Statement in 1999
is not expected to be material to the Company.

     In June 1998, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.  SFAS No.
133  established  standards  for the  accounting  and  reporting  of  derivative
instruments  and hedging  activities  and will be adopted by the Company  during
fiscal year 2000. The Company is currently evaluating the impact of the adoption
of SFAS No. 133.
15.  QUARTERLY DATA (UNAUDITED)
The following table summarizes the unaudited quarterly  statements of operations
(in millions, except per share amounts):
=======================================================================================================================
QUARTERS ENDED 1998                               MAR 31                 JUN 30               SEP 30           DEC 31
=======================================================================================================================
Sales and services                                 $ 575                  $ 565                $ 612            $ 646
Gross margin                                         178                    180                  212              241
Income before extraordinary item                      65                     71                   79               92
Extraordinary item, net of taxes                      --                     --                    2                2
Net income                                            65                     71                   81               94
Basic earnings per share:
  Before extraordinary item                        $0.37                  $0.41                $0.44            $0.51
  Extraordinary item                                  --                     --                 0.01             0.01
Basic earnings per share                           $0.37                  $0.41                $0.45            $0.52
Diluted earnings per share:
   Before extraordinary item                       $0.37                  $0.39                $0.43            $0.49
   Extraordinary item                                 --                     --                 0.01             0.01
Diluted earnings per share                         $0.37                  $0.39                $0.44            $0.50
=======================================================================================================================
QUARTERS ENDED 1997                               MAR 31                 JUN 30               SEP 30           DEC 31
=======================================================================================================================
Sales and services                                 $ 261                  $ 261                $ 358            $ 531
Gross margin                                          94                     98                  112              126
Income before extraordinary item                      40                     42                   50               56
Extraordinary item, net of tax benefit                --                     --                   (3)              --

Net income                                            40                     42                   47               56
Basic earnings per share:
  Before extraordinary item                        $0.26                  $0.26                $0.29            $0.32
  Extraordinary item                                  --                     --                (0.02)              --
Basic earnings per share                           $0.26                  $0.26                $0.27            $0.32
Diluted earnings per share:
   Before extraordinary item                       $0.25                  $0.25                $0.28            $0.32
   Extraordinary item                                 --                     --                (0.02)              --
Diluted earnings per share                         $0.25                  $0.25                $0.26            $0.32
=======================================================================================================================
SIGNATURES

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

                                                  THE AES CORPORATION

                                                  By: /s/ William R. Luraschi
                                                     ------------------------
                                                     Name: William R. Luraschi
                                                     Title: Vice President and
                                                             General Counsel

Date: March 18, 1999
EXHIBIT INDEX

EX-23 INDEPENDENT AUDITORS' CONSENT
EX-27 FDS