
                       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)      N/A
                                                 ----------------

                             The AES Corporation
               --------------------------------------------------
               (Exact Name of Registrant as specified in charter)



      Delaware                      0-19281                54-1163725
- -------------------------         ------------         -------------------
(State or other jurisdic-         (Commission            (IRS Employer
 tion of incorporation)           File Number)         Identification No.)


1001 North 19th Street, Arlington, Virginia             22209
- -------------------------------------------           ----------
(Address of principal executive offices)              (Zip Code)


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

                        N/A
- --------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 5.   OTHER EVENTS

      This Current  Report on Form 8-K includes the  Discussion  and Analysis of
Financial  Condition  and  Results  of  Operations  and  the  1996  consolidated
financial statements filed under Item 7.



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<PAGE>

                      DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The AES  Corporation  and its  subsidiaries  and affiliates are primarily in the
business of selling  electricity  to  customers in the U.S.,  England,  Northern
Ireland,  Argentina,  China,  Brazil,  Hungary and Kazakstan.  Electricity sales
accounted for 97% of total revenues during 1996 and 1995. 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 energy
consulting, wholesale power services and services provided to affiliates.

The  electricity  sold is generated (or  manufactured)  by power plants owned or
leased by subsidiaries and affiliates. AES now operates and owns (entirely or in
part) a diverse  portfolio  of electric  power  plants with a total  capacity of
9,627 megawatts. Of that total, 60% are fueled by coal or petroleum coke, 8% are
fueled by natural gas, 10% are  hydroelectric  facilities,  1% are fueled by oil
and the remaining 21% are capable of using multiple  fossil fuels.  Of the total
megawatts,  1,069 (six plants) are located in the U.S., 1,420 (three plants) are
in the UK, 840 (five plants) are in  Argentina,  229 (four plants) are in China,
1,281 (three plants) are in Hungary, 788 (four hydro-electric  complexes) are in
Brazil and 4,000 (one plant) is in  Kazakstan.  AES has grown its  portfolio  of
generating  assets by greenfield  development  and by  acquisitions  of existing
plants,  primarily through  competitively bid privatization  initiatives outside
the U.S.

AES is  currently  in the process of adding  1,672  megawatts  to its  operating
portfolio by constructing  two oil-fired  power plants in Pakistan  totaling 674
megawatts,  a 180 megawatt  coal-fired  plant in the U.S.,  one  oil-fired,  one
natural  gas-fired  and three  coal-fired  plants  in China  (one of which is an
extension  of an existing  plant)  totaling  588  megawatts  and a 230  megawatt
natural gas-fired plant in Wales. In total, AES's net equity ownership in plants
in operation and under construction is 7,475 megawatts.

Because  of the  significant  magnitude  and  complexity  of  building  electric
generating  plants,  construction  periods  often  range from two to four 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  1999.  The  completion of each plant in a
timely  manner  is  generally   supported  by  a  guarantee   from  the  plant's
construction  contractor;  however,  it remains possible,  due to changes in the
economic,  political,  technological,  regulatory  or  logistical  circumstances
surrounding  individual plants and their locations,  that commercial  operations
may be delayed.

AES believes that there is significant  demand for both new and more efficiently
operated  electric  generating  capacity in many regions around the world. In an
effort to  further  grow and  diversify  the  Company's  portfolio  of  electric
generating plants, AES is pursuing, through its integrated divisions, additional
greenfield  developments  and  acquisitions in many countries.  Several of these
acquisitions,  if consummated,  would require the Company to obtain  substantial
additional  financing,  in the form of both debt and  equity  financing,  in the
short term.

Certain   subsidiaries  and  affiliates  (domestic  and  non-U.S.)  have  signed
long-term  contracts for the sale of  electricity  and are in various  stages of
developing the related  greenfield  projects.  Because these potential  projects
have  yet  to  begin  construction  or  procure  committed  long-term  financing
("financial  closing"),  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  milestones.  As of
December  31,  1996,  capitalized  costs for  projects  under  development  were
approximately   $53  million.   The  Company   believes  that  these  costs  are
recoverable;  however,  no assurance can be given that changes in  circumstances
related to individual  development  projects will not occur or that any of these
projects will be completed and reach commercial operation.

AES has been successful in acquiring a portion of its portfolio by participating
in competitive bidding under government sponsored privatization  initiatives and
has been  particularly  interested in acquiring  existing  assets in electricity
markets  that  are  promoting  competition.  In  such  privatizations,   sellers
generally seek to complete competitive solicitations in less than one year, much
quicker than greenfield development, and require payment in

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<PAGE>

full on transfer.  AES believes that its experience in  competitive  markets and
its integrated  divisional structure,  with geographically  dispersed locations,
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 "Cash  Flows,
Financial  Resources and Liquidity") for specific potential  acquisitions.  As a
result, during 1996, the Company enhanced its financial  capabilities to respond
to these more  accelerated  opportunities  by  expanding  the  Revolver  to $425
million. AES also filed a $750 million "universal shelf" registration  statement
that  provides  for the  issuance of various  additional  debt and  preferred or
common equity  securities  either  individually or in combination.  AES also may
consider an exchange of project ownership  interests to fund future  acquisition
opportunities.

RESULTS OF OPERATIONS

Revenues

Total  revenues  increased  $156 million (23%) to $835 million from 1995 to 1996
after  increasing  $146 million  (27%) to $679  million  from 1994 to 1995.  The
increase in 1996 primarily reflects the acquisition of controlling  interests in
AES Tiszai and AES Ekibastuz.  The increase from 1994 to 1995 primarily reflects
the additional  revenues arising from the acquisition of a controlling  interest
in AES San Nicolas,  the  consolidation  of AES  Deepwater  (resulting  from the
acquisition  of its  outstanding  debt),  and improved  capacity  factors at AES
Thames and AES Barbers Point. These increases were offset, in part, by decreased
energy revenues at AES Placerita.

The nature of most of the  Company's  operations  is such that each power  plant
generally  relies on one power sales  contract  with a single  electric  utility
customer or a regional or national  transmission and  distribution  customer for
the majority,  if not all, of its  revenues.  During 1996,  the  Company's  five
largest customers accounted for 73% of total revenues.  The prolonged failure of
any one customer to fulfill its  contractual  payment  obligations in the future
could have a substantial  negative impact on AES's results of operations.  Where
possible,  the Company has sought to reduce this risk, in part, by entering into
power sales  contracts with  customers  that have their debt or preferred  stock
rated  "investment  grade"  by  nationally  recognized  rating  agencies  and 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,  or 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  may experience  difficulty in meeting  contractual
payment obligations.

In August  1996,  AES,  together  with its  partner,  acquired a 4,000  megawatt
mine-mouth,   coal-fired  power  facility  in  Kazakstan.   The  facility  sells
electricity to the  government-owned  distribution company under a 35 year power
sales  contract.  Due to economic  difficulties  over the ten years prior to the
Company's purchase,  the facility has experienced a reduction in performance and
has  operated  at a  capacity  factor of  approximately  20%.  AES has agreed to
increase  the  availability  to 63% over a five year period  (contingent  on the
purchaser's  performance  of its  obligations  under the power sales  contract).
Through December 31, 1996,  approximately $35 million (excluding VAT) was billed
under the power sales  contract for  electricity,  of which the  purchaser  paid
approximately $5 million. The Company has recorded a provision of $20 million to
reduce the carrying value of the contract  receivable as of December 31, 1996 to
$10 million.  As of December  31, 1996,  the net assets of this project were $24
million, a portion of which was represented by the contract  receivable referred
to above. There can be no assurance as to the ultimate collectibility of amounts
owed to AES as of December  31,  1996 or  additional  amounts  related to future
deliveries of electricity  under the power sales contract or the  recoverability
of the Company's  investment or additional amounts the Company may invest in the
project.  Other  substantial  risks associated with this plant exist,  including
those  relating to  operations  and  maintenance,  construction,  refurbishment,
political risk, repatriation of earnings and currency convertibility.

A portion of the  electricity  sales  from  certain  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

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<PAGE>

markets may be  volatile  and are  dependent  on the  behavior  of the  relevant
economies,  including  the demand for and retail  price of  electricity  and the
competitive price and availability of power from other suppliers.

Costs of Sales and Services

Total costs of sales and services  increased  $108 million (27%) to $502 million
in 1996 after  increasing  $129 million (49%) to $394 million from 1994 to 1995.
The  increase in 1996 was caused  primarily  by the costs of  electricity  sales
associated with the  acquisition of controlling  interests in AES Tiszai and AES
Ekibastuz. The increase from 1994 to 1995 was caused primarily by the additional
operating costs arising from the  acquisitions of a controlling  interest in AES
San Nicolas, the consolidation of AES Deepwater and increased fuel costs arising
from a higher capacity factor at AES Barbers Point,  offset in part by decreased
fuel and operating costs at AES Placerita.

Gross Margin

Gross margin  (revenues  less costs of sales and services)  increased  (prior to
consideration  of the $20 million  provision to reduce contract  receivable) $48
million  (17%) to $333  million from 1995 to 1996 after  increasing  $17 million
(6%) to $285  million  from  1994 to 1995.  The  improvement  in 1996  primarily
reflects the  additional  gross  margins  contributed  by the  operations of AES
Tiszai and AES Ekibastuz,  improved operations of AES San Nicolas and AES Thames
and higher  electricity  prices under the AES  Deepwater  sales  contract due to
higher natural gas prices.  The improvement in 1995 reflects the acquisitions of
a controlling  interest in AES San Nicolas,  the  consolidation of AES Deepwater
and improved operations at AES Placerita and AES Thames, offset in part by lower
service revenues from affiliates. Gross margin as a percentage of total revenues
(net of the provision to reduce contract receivable)  decreased from 42% in 1995
to 37% in 1996,  primarily due to lower gross margin  percentages  at AES Tiszai
and AES Ekibastuz,  offset in part by an improved gross margin percentage at AES
Deepwater.  Gross margin as a percentage of total revenues decreased from 50% in
1994 to 42% in 1995, primarily due to a lower gross margin percentage at AES San
Nicolas.

Because the Company's  operations are located in different  geographical  areas,
seasonal  variations have not historically had a significant effect on quarterly
financial results. However, unusual weather conditions and the specific needs of
each plant to perform routine or unanticipated facility maintenance, which would
require  an outage,  could have an effect on  quarterly  financial  results.  In
addition,   some  power  sales   contracts   permit  the  utility   customer  to
significantly  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 less than $3 million (9%)
to $35 million from 1995 to 1996 after  increasing  less than $1 million (3%) to
$32 million from 1994 to 1995. The 1996 increase is attributable to increases in
administrative  costs  and  expenses  associated  with  the  development  of new
business  opportunities.  The 1995  increase is  attributable  to an increase in
administrative  costs. As a percentage of total revenues,  selling,  general and
administrative  expenses decreased to 4% in 1996, down from 5% in 1995 and 6% in
1994. The Company's  general and  administrative  costs do not necessarily  vary
with changes in revenues.

Operating Income

Operating  income  improved $25 million  (10%) to $278 million from 1995 to 1996
after  increasing  $17  million  (7%) to $253  million  from  1994 to 1995.  The
increases result from the factors discussed in the preceding paragraphs,  offset
in part  for  1996 by the  provision  of $20  million  to  reduce  the  contract
receivable at AES Ekibastuz.

Other Income and Expense

Other  income and  expense,  on a net basis,  decreased  $1 million  (1%) to $85
million from 1995 to 1996 after  decreasing  $5 million (5%) to $86 million from
1994 to 1995. Interest expense increased 13% in 1996 and

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<PAGE>

increased  2% in  1995.  The  increase  in  1996  reflects  additional  interest
associated with increased  borrowings  under the Revolver,  the issuance in June
1996 of $250 million of the Company's 10 1/4% senior subordinated notes due 2006
(the "10 1/4 Notes") and project  financing debt associated with the acquisition
of the Company's  equity  investment in Light and additional  project  financing
debt  associated  with the  acquisition  of AES  Tiszai,  offset,  in  part,  by
declining balances related to other project financing debt. The increase in 1995
reflects the additional  interest  expense  associated with the acquisition of a
controlling  interest in AES San Nicolas  offset  almost  entirely by  declining
balances of other project  financing  debt. AES  capitalizes  interest  incurred
during the development and construction of its facilities.  Interest capitalized
totaled  approximately $27 million in 1996, $8 million in 1995 and $2 million in
1994.

Interest  income  decreased  11% in 1996 and  increased  23% in  1995.  The 1996
decrease  results  primarily from lower invested funds at AES Chigen,  offset in
part by interest  income  earned on notes  receivable  at AES  Tiszai.  The 1995
increase  reflects  higher cash and debt  service  reserve  account  balances at
operating  plants,  higher  interest  rates and a full year of  interest  on AES
Chigen's  invested cash balances,  offset in part by investments in new projects
at AES Chigen and a decrease in the balance of corporate  unrestricted  cash and
cash equivalents.

Equity in earnings of affiliates (after income taxes) increased 150% in 1996 and
17% in 1995.  The increase in 1996 results  almost  entirely  from the Company's
acquisition of an 11.35%  interest in Light in June 1996,  offset  slightly by a
decrease in equity in earnings from NIGEN due to a planned outage.  The increase
in 1995 results most  significantly  from the start of  operations  at Medway in
late 1995.

Income Taxes

The  Company's  effective  tax rate  increased to 40% in 1996 and to 38% in 1995
from 34% in 1994.  The increase in 1996 is due primarily to foreign  withholding
and income  taxes.  The increase in 1995 is due to the  elimination  of the U.S.
federal  valuation  allowance  resulting  from  the  purchase  in  1995  of  the
previously outstanding debt of AES Deepwater.

Extraordinary Items

During  1994,  the  Company  purchased  and  retired  the  subordinated  project
financing  debt  and  accrued  interest  at  AES  Placerita,   resulting  in  an
extraordinary  gain of $4 million,  net of taxes.  Also, in 1994,  the Company's
affiliate,  NIGEN,  refinanced its outstanding  project financing loan through a
public  debenture  offering.  The  extinguishment  of such debt  resulted  in an
extraordinary  loss of $7 million,  of which the Company's share was $2 million,
net of taxes.

OUTLOOK

All over the world,  electricity  markets are being  restructured and there is a
trend 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  systems.  Some countries
(for example, the UK, 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   has  created   significant  new  business
opportunities for companies like AES.

Although  recent  activity  in the U.S.  electricity  market has  provided  some
opportunities  for  independent  and competitive  power  companies,  most of the
country's  generating  capacity along with substantially all of the transmission
and  distribution  services  continue to be regulated  under a state and federal
regulatory  framework.  In the  U.S.,  some  states  (for  example,  California,
Illinois,   Massachusetts,   Michigan  and  Pennsylvania)  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 1998 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.

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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
"patchwork quilt" effect of each state acting  separately to pass  restructuring
legislation.  While it is uncertain whether or when federal  legislation dealing
with electricity restructuring might be passed, it is the opinion of the Company
that such  legislation  would  likely have a neutral or  positive  effect on the
Company's U.S. business.

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 capacity from  vertically  integrated  utilities  would  presumably
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 in the integrity of its contracts,  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.

It is also possible  that as more of the world's  markets for  electricity  move
toward  competition,  an increasing  proportion of the Company's revenues may be
dependent on prices determined in 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  plants  in those  markets.  Such an
investment,  which would not necessarily be supported by a long-term electricity
sales contract for all or any of the plant's  expected  output,  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.

AES's  involvement  in the  development  of new projects and the  acquisition of
existing  plants in locations  outside the U.S. is increasing  and most of AES's
current  development  and  acquisition  activities  are for  projects and plants
outside the U.S. The financing,  development  and operation of such projects and
plants may entail  significant  political and financial  uncertainties and other
structuring issues (including, without limitation, uncertainties associated with
the legal environments,  with first-time  privatization efforts in the countries
involved,   currency   exchange   rate   fluctuations,   currency   repatriation
restrictions,  currency convertibility,  political instability, civil unrest and
expropriation).  These issues have the potential to cause substantial  delays in
respect of or material impairment of the value of the project being developed or
plant being operated,  which AES may not be capable of or choose to fully insure
or hedge against.

FINANCIAL POSITION

At December  31,  1996,  AES had working  capital of $120 million as compared to
$218  million at the end of 1995.  The  decrease is  primarily  attributable  to
decreased  balances of cash and  short-term  investments,  increases in accounts
payable  and  accrued  liabilities  and  increases  in the  current  portion  of
borrowings  under the Revolver  and project  financing  debt,  offset in part by
increases in inventory, accounts receivable and deferred income taxes.

Property,  plant  and  equipment,  net of  accumulated  depreciation,  was $2.22
billion at December 31, 1996, up from $1.55 billion at the end of 1995.  The net
increase of $670 million  (43%) is  primarily  attributable  to the  acquisition
during 1996 of AES San Juan, AES Tiszai and AES Ekibastuz,  the  continuation of
construction  activities at AES Lal Pir, AES Pak Gen and AES Warrior Run and the
commencement of construction activities at Jiaozou and AES Barry.

Other assets increased $555 million (161%) to $900 million  primarily due to the
Company's  purchase of and  undistributed  earnings  from an 11.35%  interest in
Light, payments to debt service reserves,  payments for deferred financing costs
associated  with a higher  level of debt  financing,  reimbursable  payments for
contracts  related to a project in development  and intangible  assets  acquired
through the purchase of AES San Juan.

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<PAGE>

Project  financing debt, net of repayments,  increased as a result of additional
borrowings associated with the Company's purchase of an 11.35% interest in Light
and additional  construction borrowings associated with AES Lal Pir, AES Pak Gen
and AES Warrior  Run. A  significant  portion of the AES Lal Pir and AES Pak Gen
loans,  associated  with  equipment  purchases,  will be borrowed and repaid (as
scheduled in the future) in Japanese  yen. The  anticipated  electricity  prices
under  the  related  power  sales  contracts  (to  be  received  beginning  with
commercial  operation of those plants) also include a yen component  designed to
correlate with the yen-based financing.

Other notes payable (non-current)  increased $325 million (260%) to $450 million
as a  result  of the  issuance  of the $250  million  of the 10 1/4%  Notes  and
increased  borrowings  under the Revolver of $125 million that are due in excess
of one year,  offset in part by the conversion of $50 million of the Company's 6
1/2% convertible subordinated debentures.

CASH FLOWS, FINANCIAL RESOURCES AND LIQUIDITY

Cash from Operations

Cash flows provided by operating  activities totaled $182 million during 1996 as
compared to $197 million  during 1995 and $164 million in 1994.  The decrease in
1996 was primarily  due to a larger  proportion of net income being derived from
undistributed  earnings from  affiliates,  larger cash payments for income taxes
and increased  deferred  financing costs  associated with a higher level of debt
financing  activity in 1996. These factors offset a significant  increase in net
income  before  depreciation  as compared  with 1995.  The  increase in 1995 was
primarily  due to  increased  pre-tax  income.  Unrestricted  net cash  flow (as
defined in the  Indenture  for the 10 1/4%  Notes,  which is after cash paid for
general and  administrative  costs, taxes and project  development  expenses but
before  investments and debt service) amounted to approximately $133 million for
the year ended  December 31, 1996 as compared to $110 million for the year ended
December 31, 1995.

Cash from Investing Activities

Net cash used in investing  activities  totaled  $1.135  billion  during 1996 as
compared to $343 million  during 1995 and $120 million in 1994.  The 1996 amount
primarily  reflects  the  acquisitions  of AES  San  Juan,  AES  Tiszai  and AES
Ekibastuz;  the Light investment;  construction progress at AES Lal Pir, AES Pak
Gen,  AES  Warrior  Run and AES  Barry;  AES  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.  The 1995  amount  primarily  reflects  the  Company's
investments in the outstanding  debt of AES Deepwater;  additional  ownership in
AES San Nicolas;  the acquisition of AES Rio Juramento;  construction efforts at
AES Lal Pir, AES Pak Gen and AES Warrior Run;  and AES Chigen's  investments  in
the Wuxi and Yangchun Fuyang projects.  The 1994 amount  primarily  reflects the
investment of cash in short-term investments,  capital additions and investments
in projects in development.

Cash from Financing Activities

Net cash provided by financing activities aggregated $899 million during 1996 as
compared to $130 million  during 1995 and $80 million in 1994.  The  significant
cash financing  inflows in 1996 were caused by  construction  loan draws for AES
Lal Pir, AES Pak Gen and AES Warrior Run; project  acquisition  financing of the
Light investment; issuance of $250 million of the 10 1/4% Notes; initial project
financing at AES 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.  During  1995 the Company  drew on its
project  financing loan commitments  associated with the construction of AES Lal
Pir and AES Warrior Run and borrowed  under the Revolver.  Repayments of project
financing  loans during the year were made in accordance  with  contracted  debt
service  requirements.  During  1994,  AES Chigen  completed  an initial  public
offering of 10.2 million  shares of Class A common stock.  The Company also made
scheduled principal payments on project financing debt in 1994.

Financial Resources and Liquidity

AES  has  primarily  utilized  project  financing  loans  to  fund  the  capital
expenditures  associated  with  constructing  and acquiring  its electric  power
plants and related assets.  Project financing borrowings have been substantially
non-

                                      8
<PAGE>

recourse to other  subsidiaries and affiliates and to The AES Corporation as the
parent company and are generally secured by the capital stock,  physical assets,
contracts and cash flow of the related  project  subsidiary  or  affiliate.  The
Company intends to continue to seek, where possible,  such non-recourse  project
financing in connection  with the assets which the Company or its affiliates may
develop,  construct or acquire. However,  depending on market conditions and the
unique   characteristics  of  individual  projects,  the  Company's  traditional
providers of project financing, particularly multinational commercial banks, 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) 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   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  project,  and  may  cease
development of such project.

In  addition  to the project  financing  loans,  if  available,  AES  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 senior subordinated notes,  convertible debentures and common stock
of the Company. In August 1996, substantially all $50 million of the Company's 6
1/2%  convertible  subordinated  debentures  due in  2002  were  converted  into
approximately  1.9 million shares of AES Common Stock.  The Company also expects
to issue approximately 2.5 million shares of AES Common Stock to purchase all of
the  remaining  outstanding  Class A shares of AES Chigen at an exchange rate of
0.29  shares of AES Common  Stock for each  share of AES  Chigen  Class A common
stock in April  1997,  subject to  approval by the holders of the Class A common
stock.

Interim  needs for  shorter-term  and working  capital  financing  at the parent
company have been met with borrowings under the Revolver.  Over the past several
years,  the Company has continued to increase the amount of available  financing
under the Revolver. In the second quarter of 1996, AES increased the size of the
Revolver to $425 million.  Under the terms of the Revolver, AES will be required
to reduce its direct  borrowings to $125 million for 30 consecutive  days during
each twelve  month  period.  The terms of the Revolver  also  include  financial
covenants  related to net worth,  cash flow and  investments,  and  restrictions
related to the incurrence of additional  debt and certain other  obligations and
limitations on cash dividends. At December 31, 1996, cash borrowings and letters
of credit  outstanding  under the  Revolver  amounted  to $213  million and $123
million, compared with $50 million and $56 million in 1995. The Company may also
attempt to meet its short-term and interim funding needs with  commitments  from
banks and other financial  institutions at the parent or subsidiary  level on an
as needed basis.

The ability of AES's subsidiaries and affiliates to declare and to 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  project-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.   These  obligations  and
contingent  liabilities,  excluding those  collateralized using letter of credit
obligations  under the Revolver,  were limited by their terms as of December 31,
1996 to an aggregate of  approximately  $176  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, 1996. 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 plants and projects is
a distinct entity,  the plants and projects are  geographically  diverse and the
obligations  related to a single plant or project 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. AES's

                                      9
<PAGE>

obligations and contingent liabilities described above in certain cases take the
form of, or are supported by, letters of credit.

At December 31, 1996, the Company had future  commitments to fund investments in
its projects under  construction  and in  development  of $106 million.  Of this
amount,  letters  of credit in the  amount of $76  million  have been  issued to
support these  obligations.  In February 1997, the Company agreed to acquire the
international  assets  of  Destec  at a  total  price  to  AES of  $407  million
(including  approximately $42 million of net monetized  assets),  which price is
subject to adjustment to reflect net cash flow between the international  assets
and the rest of Destec from January 1, 1997 to the closing date. The Company has
not yet purchased such assets, but at the time of any such purchase,  expects to
assume certain  obligations  which require the funding of equity  investments in
some of these  projects  in the amount of  approximately  $82  million  over the
ensuing two years. These future capital commitments are expected to be funded by
internally-generated cash flows and by external financings as may be necessary.

Inflation, Interest Rates, Exchange Rates, Changing Energy Prices and
Environmental Performance

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.  AES has  generally  structured  the energy
payments in its power sales  contracts to adjust with similar  price  indices as
its contracts  with the fuel  suppliers for the  corresponding  plants.  In some
cases a portion of revenues is associated with operations and maintenance costs,
and as such is indexed  to adjust  with  inflation.  AES has also used a hedging
strategy 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 hedges
against  interest  rate  fluctuations  by arranging  fixed-rate or variable rate
financing,  respectively.  In certain cases, the Company executes  interest rate
swap and interest rate cap agreements to  effectively  fix or limit the interest
rate on the underlying variable rate financing. Such swaps effectively increased
the total weighted average borrowing rate on the portion of the Company's hedged
debt by 4.1 percentage  points,  3.5 percentage points and 4.5 percentage points
for the  years  ended  December  31,  1994,  1995 and 1996,  respectively.  Swap
payments in excess of variable  interest  paid for those same  periods  were $44
million, $24 million and $29 million, respectively. The following table presents
(in  millions) the aggregate  notional  principal  amount of interest rate swaps
categorized  by annual  maturity at December 31, 1996 and the  weighted  average
interest  rates paid and received  (based on market  conditions  at December 31,
1996):

PAY FIXED RATE SWAPS

<TABLE>
<CAPTION>
                                                       ----------------------------------------------
                                                                                  WEIGHTED AVERAGE
                                                       AGGREGATE NOTIONAL           INTEREST RATE
                  ANNUAL MATURITY                       PRINCIPAL AMOUNT         PAID       RECEIVED
- ----------------------------------------------------   -------------------      ------      ---------
<S>                                                           <C>               <C>             <C>
1997................................................          $ 137             12.48%          5.46%
1998................................................          $  15              9.90%          5.43%
1999................................................          $ 167             10.40%          5.45%
2000................................................          $  17              9.90%          5.43%
2001 through 2007...................................          $ 214              9.90%          5.43%
</TABLE>

In  addition,  certain  subsidiaries  of the  Company  have  interest  rate  cap
agreements  with terms ranging from three to six years in an aggregate  notional
amount of $280 million.

The hedging  mechanisms  described  above are  implemented  through  contractual
provisions with fuel suppliers and international  financial  institutions.  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 risk by  entering  into  contracts  with
creditworthy  organizations,  where possible,  and where not possible, as in the
case of certain local fuel suppliers,  to execute  standby or option  agreements
with a creditworthy organization.

Because of the complexity of hedging  strategies and the diverse nature of AES's
operations,  the financial performance of its portfolio,  although significantly
hedged, will likely be somewhat affected by fluctuations in inflation,  interest
rates and energy  prices.  For  example,  AES's  current  portfolio of operating
plants generally performs better

                                      10
<PAGE>

with  higher  oil  and  natural  gas  prices  and  with  lower  interest  rates.
Performance is also sensitive to the difference  between  inflation and interest
rates, and generally performs better when increases in inflation are higher than
increases in interest rates.

Through its equity  investments  in foreign  affiliates  and  subsidiaries,  AES
operates  in  jurisdictions  dealing  in  currencies  other  than the  Company's
consolidated functional currency, the U.S. dollar. Such investments and advances
were made to fund equity  requirements and to provide  collateral for contingent
obligations.  Due  primarily  to the  long-term  nature of the  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 any
differences  would be  recognized  in the  statement of  operations  as gains or
losses.

In addition,  certain of the Company's  foreign  subsidiaries  have entered into
obligations in currencies other than their own functional currencies or the U.S.
dollar.  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  effect of
currency devaluation, if any.

The Company had approximately $33 million in cumulative  translation  adjustment
losses at December 31, 1996.

Because of the nature of AES's  operations and previous  operations by others at
certain of its  current and future  facilities,  its  activities  are subject to
stringent  environmental  regulation  by  relevant  authorities  at  each  plant
location and the risk of claims under  environmental laws. 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 will be required to make significant capital
or other  expenditures in connection with  environmental  matters.  Although the
Company is not aware of non-compliance  with environmental laws which would have
a material adverse effect on the Company's business or financial  condition,  at
times the Company has been in  non-compliance,  although  no such  instance  has
resulted in revocation of any permit or license.

                                      11
<PAGE>
ITEM 7.   FINANCIAL STATEMENTS AND EXHIBITS

      (a) Financial Statements:

      The  Company's  consolidated  balance  sheets as of December  31, 1996 and
1995, and the related  consolidated  statements of operations and cash flows for
each of the three years in the period ended December 31, 1996.

      (b) Exhibits:

      11  Statement of Computation of Earnings per Share

      12  Calculations of Ratio of Earnings to Fixed Charges

      23  Consent of Deloitte & Touche LLP

      27  Financial Data Schedule



                                      12
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Stockholders Of The AES Corporation:

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

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

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

DELOITTE & TOUCHE LLP
Washington, DC
January 30, 1997, except for Note 13,
as to which the date is February 18, 1997

                                      13
<PAGE>

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                         ---------------
                                                                                           DECEMBER 31
In millions, except par values                                                            1996      1995
                                                                                         ------    ------
<S>                                                                                      <C>       <C>
ASSETS
Current Assets:
  Cash and cash equivalents...........................................................   $  185    $  239
  Short-term investments..............................................................       20        58
  Accounts receivable, net............................................................       95        54
  Inventory...........................................................................       81        36
  Receivable from affiliates..........................................................        9        11
  Deferred income taxes...............................................................       65        21
  Prepaid expenses and other current assets...........................................       47        27
                                                                                         ------    ------
Total current assets..................................................................      502       446
Property, Plant and Equipment:
  Land................................................................................       30         9
  Electric and steam generating facilities............................................    1,884     1,594
  Furniture and office equipment......................................................       14        11
  Accumulated depreciation and amortization...........................................     (282)     (222)
  Construction in progress............................................................      574       158
                                                                                         ------    ------
Property, plant and equipment, net....................................................    2,220     1,550
Other Assets:
  Deferred costs, net.................................................................       47        32
  Project development costs...........................................................       53        41
  Investments in and advances to affiliates...........................................      491        48
  Debt service reserves and other deposits............................................      175       168
  Goodwill & other intangible assets, net.............................................       52        37
  Other assets........................................................................       82        19
                                                                                         ------    ------
Total other assets....................................................................      900       345
                                                                                         ------    ------
Total.................................................................................   $3,622    $2,341
                                                                                         ======    ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable....................................................................   $   64    $   33
  Accrued interest....................................................................       25        12
  Accrued and other liabilities.......................................................       95        49
  Other notes payable -- current portion..............................................       88        50
  Project financing debt -- current portion...........................................      110        84
                                                                                         ------    ------
Total current liabilities.............................................................      382       228
Long-Term Liabilities:
  Project financing debt..............................................................    1,558     1,098
  Other notes payable.................................................................      450       125
  Deferred income taxes...............................................................      243       170
  Other long-term liabilities.........................................................       55        13
                                                                                         ------    ------
Total long-term liabilities...........................................................    2,306     1,406
Minority Interest.....................................................................      213       158
Commitments and Contingencies.........................................................       --        --
Stockholders' Equity:
  Preferred stock (no par value; 1 million shares authorized; none issued)............       --        --
  Common stock ($.01 par value; 100 million shares authorized; shares issued and
    outstanding: 1996 -- 77.4 million; 1995 -- 74.8 million)..........................        1         1
  Additional paid-in capital..........................................................      360       293
  Retained earnings...................................................................      396       271
  Cumulative foreign currency translation adjustment..................................      (33)      (10)
Less treasury stock at cost (1996 -- .1 million shares; 1995 -- .3 million shares)....       (3)       (6)
                                                                                         ------    ------
Total stockholders' equity............................................................      721       549
                                                                                         ------    ------
Total.................................................................................   $3,622    $2,341
                                                                                         ======    ======
</TABLE>

                See notes to consolidated financial statements.

                                      14
<PAGE>

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          ----------------------
                                                                            FOR THE YEARS ENDED
                                                                                DECEMBER 31
In millions, except per share amounts                                     1996     1995     1994
                                                                          -----    -----    -----
<S>                                                                       <C>      <C>      <C>
REVENUES:
  Sales................................................................   $ 824    $ 672    $ 514
  Services.............................................................      11        7       19
                                                                          -----    -----    -----
Total revenues.........................................................     835      679      533

OPERATING COSTS AND EXPENSES:
  Cost of sales........................................................     495      388      252
  Cost of services.....................................................       7        6       13
  Selling, general and administrative expenses.........................      35       32       32
  Provision to reduce contract receivable..............................      20       --       --
                                                                          -----    -----    -----
Total operating costs and expenses.....................................     557      426      297
                                                                          -----    -----    -----
OPERATING INCOME.......................................................     278      253      236
OTHER INCOME AND (EXPENSE):
  Interest expense.....................................................    (144)    (127)    (125)
  Interest income......................................................      24       27       22
  Equity in earnings of affiliates (net of income tax).................      35       14       12
                                                                          -----    -----    -----
INCOME BEFORE INCOME TAXES, MINORITY INTEREST, AND EXTRAORDINARY
  ITEM.................................................................     193      167      145
INCOME TAXES...........................................................      60       57       44
MINORITY INTEREST......................................................       8        3        3
                                                                          -----    -----    -----
INCOME BEFORE EXTRAORDINARY ITEM.......................................     125      107       98
Extraordinary item -- net gain on extinguishment of debt (less
  applicable income taxes of $1).......................................      --       --        2
                                                                          -----    -----    -----
NET INCOME.............................................................   $ 125    $ 107    $ 100
                                                                          =====    =====    =====
NET INCOME PER SHARE:
  Before extraordinary gain............................................   $1.62    $1.41    $1.30
  Extraordinary gain...................................................      --       --     0.02
                                                                          -----    -----    -----
NET INCOME PER SHARE...................................................   $1.62    $1.41    $1.32
                                                                          =====    =====    =====
</TABLE>

                See notes to consolidated financial statements.

                                      15

<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        ------------------------
                                                                           FOR THE YEARS ENDED
                                                                               DECEMBER 31
In millions                                                               1996      1995     1994
                                                                        -------    -----    -----
<S>                                                                     <C>        <C>      <C>
OPERATING ACTIVITIES:
Net income...........................................................   $   125    $ 107    $ 100
Adjustments to net income:
  Depreciation and amortization......................................        65       55       43
  Provision for deferred taxes.......................................        26       48       39
  Undistributed earnings of affiliates...............................       (20)       3       (3)
Payments for deferred financing costs................................       (13)      (3)      (6)
Other................................................................         6        4       --
Changes in working capital...........................................        (7)     (17)      (9)
                                                                        -------    -----    -----
Net cash provided by operating activities............................       182      197      164

INVESTING ACTIVITIES:
Property additions...................................................      (506)    (171)     (10)
Acquisitions, net of cash acquired...................................      (148)    (121)      --
Sale of short-term investments.......................................       103      254      132
Purchase of short-term investments...................................       (66)    (218)    (204)
Affiliate advances and investments...................................      (430)     (10)      --
Project development costs............................................       (16)     (22)     (17)
Debt service reserves and other assets...............................       (72)     (55)     (21)
                                                                        -------    -----    -----
Net cash used in investing activities................................    (1,135)    (343)    (120)

FINANCING ACTIVITIES:
Net borrowings under the revolver....................................       163       50       --
Issuance of project financing debt and other notes payable...........       802      133       --
Repayments of project financing debt.................................       (75)     (63)     (72)
Other liabilities....................................................        (3)       8       --
Contributions by minority interests..................................        10        7      152
Sale (repurchase) of common stock....................................         2       (5)      --
                                                                        -------    -----    -----
Net cash provided by financing activities............................       899      130       80

INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS.....................       (54)     (16)     124

CASH AND CASH EQUIVALENTS, BEGINNING.................................       239      255      131
                                                                        -------    -----    -----
CASH AND CASH EQUIVALENTS, ENDING....................................   $   185    $ 239    $ 255
                                                                         ======    =====    =====
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest...........................................   $   134    $ 120    $ 127
Cash payments for income taxes.......................................        32        6        3
</TABLE>

                See notes to consolidated financial statements.

                                      16
<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 developing, owning
and operating electric power generating facilities.

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

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

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

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

<TABLE>
<CAPTION>
                                                                          ------------
                                                                          DECEMBER 31
                                                                          1996    1995
                                                                          ----    ----
        <S>                                                               <C>     <C>
        Coal and other raw materials...................................   $57     $24
        Spare parts, materials and supplies............................    24      12
                                                                          ---     ---
        Total..........................................................   $81     $36
                                                                          ===     ===
</TABLE>

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

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

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

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

                                      17
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

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

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

NET INCOME PER SHARE -- Net  income per share is based on the  weighted  average
number of common stock and common stock  equivalents  outstanding,  after giving
effect to stock splits and stock dividends. Common stock equivalents result from
dilutive stock options,  warrants and deferred  compensation  arrangements.  The
effect of such  common  stock  equivalents  on net income per share is  computed
using the treasury  stock  method.  The shares used in computing  net income per
share were 77.3 million, 75.9 million, and 75.8 million for 1996, 1995 and 1994,
respectively. Primary and fully diluted earnings per share are approximately the
same.

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

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

2. ACQUISITIONS

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

In May 1996, AES, through certain subsidiaries, acquired for approximately $393
million, common shares representing an 11.35% interest in Light Servicos de
Electricidade S. A. ("Light"), a publicly-held Brazilian corporation

                                      18

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. ACQUISITIONS (CONTINUED)

that  operates  as  the  concessionaire  of  an  approximately   3,800  megawatt
integrated electric power generation, transmission and distribution system which
serves Rio de  Janeiro,  Brazil.  The AES  subsidiary  which owns an interest in
Light is  participating  in a  consortium  established  through a  shareholders'
agreement that owns a 50.44% controlling  interest. As a result, the Company has
the ability to exert  significant  influence over the operation of Light, and is
recording its investment using the equity method.

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

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

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

In June and July 1995,  a  subsidiary  of the Company  increased  its  ownership
interest  in Central  Termica  San  Nicolas,  S. A. ("AES San  Nicolas"),  a 650
megawatt power plant located in San Nicolas, Argentina from approximately 34% to
approximately   69%  by  purchasing   the  interests  of  two  former   minority
shareholders.  The  1995  purchase  price  was  $24  million.  The  net  results
attributable to the Company's non-owned portion of earnings from AES San Nicolas
in 1995 is reflected as minority interest.

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

These  acquisitions  were  accounted  for  as  purchases.   The  purchase  price
allocations  for Light,  AES Tiszai and AES Ekibastuz  have been  completed on a
preliminary basis, subject to adjustments resulting from new or additional facts
that may come to light when the engineering,  environmental,  and legal analyses
are  completed  during  the  allocation  period.   The  accompanying   financial
statements  include the operating results of AES Tiszai from August 1, 1996, the
operating  results of AES Ekibastuz from August 10, 1996,  equity  earnings from
Light  from June 10,  1996,  and the  operating  results of AES  Deepwater  from
January 20, 1995, the operating  results of AES San Nicolas from January 1, 1995
and the operating results of AES Rio Juramento from December 1, 1995. The

                                     19
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. ACQUISITIONS (CONTINUED)

following table presents supplemental unaudited proforma operating results as if
all of the  acquisitions  had occurred at the  beginning  of 1995 (in  millions,
except per share amounts):

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

The 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, 1995, nor are they intended to be a projection of future results.

3. INVESTMENTS

At December 31, 1996 and 1995,  the  Company's  investments  were  classified as
either held-to-maturity or available-for-sale.  The amortized cost and estimated
fair value of the  investments  at  December  31,  1996 and 1995  classified  as
held-to-maturity and available-for-sale were approximately the same.

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

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

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

4. INVESTMENTS IN AND ADVANCES TO AFFILIATES

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

                                      20
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. INVESTMENTS IN AND ADVANCES TO AFFILIATES (CONTINUED)

December 31, 1995 and 1994 and for the years then ended, and the accounts of San
Nicolas (34% owned  Argentine  affiliate)  at December 31, 1994 and for the year
then ended.

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

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

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

5. DEBT

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

<TABLE>
<CAPTION>
                                                             -----------------------------------------
                                                           INTEREST RATE     FINAL
                                                            @ 12/31/96      MATURITY     1996      1995
                                                           -------------    --------    ------    ------
<S>                                                        <C>              <C>         <C>       <C>
Senior Debt -- floating
AES Beaver Valley.......................................        7.4%          1998      $   21    $   33
AES Thames..............................................        6.8%          2004         163       181
AES Shady Point.........................................        7.4%          2004         306       320
AES Barbers Point.......................................        6.5%          2007         325       340
AES Lal Pir.............................................        5.0%          2008         135        28
AES Pak Gen.............................................        5.1%          2010          90        --
AES Coral Reef..........................................       10.1%          2003         168        --
AES Warrior Run.........................................        6.7%          2014          37        22
Other...................................................       10.4%          2001           8        --
Senior Debt -- fixed
AES Placerita -- capital lease..........................        8.1%          2009         105       111
AES Warrior Run -- tax exempt bonds.....................        7.4%          2019          74        74
AES Pak Gen.............................................        4.3%          2007          85        --
AES San Nicolas.........................................       10.4%          2000          80        --
Subordinated Debt.......................................       13.6%          2010          71        73
                                                                                        ------    ------
Subtotal................................................                                 1,668     1,182
Less current maturities.................................                                  (110)      (84)
                                                                                        ------    ------
Total...................................................                                $1,558    $1,098
                                                                                        ======    ======
</TABLE>

                                      22
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. DEBT (CONTINUED)

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

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

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

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

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

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

- ---------------
* floating rate loan

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

                                      22
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. DEBT (CONTINUED)

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

<TABLE>
<CAPTION>
                -------------------------------------------------------------
                <S>                                                    <C>
                1997................................................   $  198
                1998................................................      132
                1999................................................      303
                2000................................................      269
                2001................................................      202
                Thereafter..........................................    1,102
                                                                       ------
                Total...............................................   $2,206
                                                                       ======
</TABLE>

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

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

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

6. COMMITMENTS AND CONTINGENCIES

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

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

GUARANTEES -- In connection with certain of its project financing,  acquisition,
disposition, and power purchase agreements, AES has expressly undertaken limited
obligations  and  commitments  most of which will only be  effective  or will be
terminated  upon  the  occurrence  of  future  events.   These  obligations  and
commitments,  excluding  letter  of credit  obligations  discussed  below,  were
limited as of December 31, 1996, by the terms of the agreements, to an aggregate
of  approximately  $176  million.  The  Company is also  obligated  under  other
commitments which are limited to amounts, or percentages of amounts, received by
AES as distributions from its project subsidiaries. These amounts aggregated $33
million as of December 31, 1996.

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

LITIGATION -- On February 25, 1993, an action was filed,  jointly and severally,
in the 10th  Judicial  District  Court,  Galveston  County,  Texas  against  the
Company, over 25 other corporations (including major oil refineries and chemical
companies)  and  utilities,  a utility  district,  four Texas  cities,  McGinnes
Industrial Maintenance Corpora-

                                      23
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

tion,  Roland  McGinnes  and  Lawrence  McGinnes,  claiming  personal  injuries,
property, and punitive damages of $20 billion,  arising from alleged releases of
hazardous  and toxic  substances  to air,  soil and water at the McGinnes  waste
disposal site located in Galveston County. This matter was consolidated with two
other related cases in December 1993.  The complaint sets forth numerous  causes
of action,  including fraud, negligence and strict liability,  including,  among
other things,  allegations that the defendants sent hazardous, toxic and noxious
chemicals and other waste  products to the McGinnes site for disposal.  In March
1995, the Company entered into a settlement  agreement with certain  plaintiffs,
pursuant  to which the  Company  paid  seven  thousand  dollars  in  return  for
withdrawal  of  their  claims  against  the  Company.  Based  on  the  Company's
investigation  of the case to date,  the  Company  believes  it has  meritorious
defenses  to each and every  cause of action  stated in the  complaint  and this
action is being  vigorously  defended.  The Company believes that the outcome of
this matter will not have a material adverse effect on its results of operations
or financial position.

On December 17, 1996, AES was named  defendant in a complaint filed in the Court
of Chancery in Delaware. The suit was brought by the holder of 750 shares of AES
Chigen Class A Common Stock  individually  and on behalf of a purported class of
public  shareholders  of AES Chigen in response to an amalgamation to be entered
into between AES Chigen and AES. The complaint alleges, among other things, that
AES breached its alleged  fiduciary  duty as a controlling  shareholder to treat
the class with fairness,  and questions the sufficiency of the  consideration to
be paid to AES Chigen  shareholders.  The complaint seeks damages and injunctive
relief.  AES  Chigen  was  not  named  in  the  suit.  Based  on  the  Company's
investigation  of the case to date,  the  Company  believes  it has  meritorious
defenses  to each and every  cause of action  stated in the  complaint  and this
action is being  vigorously  defended.  The Company believes that the outcome of
this matter will not have a material adverse effect on its results of operations
or financial position.

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

                                      24
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                           --------------------
(In millions)                                                              1996    1995    1994
                                                                           ----    ----    ----
<S>                                                                        <C>     <C>     <C>
Common stock
  Balance at January 1 and December 31..................................   $  1    $  1    $  1
                                                                           ====    ====    ====
Additional paid-in capital
  Balance at January 1..................................................   $293    $240    $203
  Issuance of common stock under benefit plans and exercise of stock
     options ...........................................................      3       2       2
  Tax benefit associated with the exercise of options...................     15      --      --
  Issuance of common stock on conversion of 6.5% subordinated
     debentures, net ($26.16 per share).................................     49      --      --
  Common stock dividends (1994-3% per share)............................     --      --      47
  AES Chigen Class A redeemable common stock............................     --      51     (12)
                                                                           ----    ----    ----
Balance at December 31..................................................   $360    $293    $240
                                                                           ====    ====    ====
Retained earnings
  Balance at January 1..................................................   $271    $164    $111
  Net income for the year...............................................    125     107     100
  Common stock dividends (1994-3% per share)............................     --      --     (47)
                                                                           ----    ----    ----
Balance at December 31..................................................   $396    $271    $164
                                                                           ====    ====    ====
Cumulative foreign currency translation adjustment
  Balance at December 31................................................   $(33)   $(10)   $ (3)
                                                                           ====    ====    ====
Treasury stock
Balance at December 31..................................................   $ (3)   $ (6)   $ --
                                                                           ====    ====    ====
</TABLE>

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

On July 30, 1996, the Company  exercised its right to redeem the Debentures at a
redemption  price equal to  approximately  104% of the  principal  amount of the
debentures,  together with accrued interest through the date of redemption. As a
result,  $49.7 million of the debentures  were converted into 1.9 million shares
of common stock of the Company at a conversion price of $26.16 per share.

Stock  Options and  Warrants  -- The  Company has granted  options for shares of
common stock under its stock  option  plans.  Under the terms of the plans,  the
Company may issue options to purchase shares of the Company's  common stock at a
price equal to 100% of the market  price at the date the option is granted.  The
options become eligible

                                      25
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. STOCKHOLDERS' EQUITY (CONTINUED)

for  exercise  under  various  schedules.  At  December  31,  1996,  there  were
approximately  2 million  shares  reserved for future grants under the plans.  A
summary of the option activity follows (in thousands of shares):

<TABLE>
<CAPTION>
                                             -----------------------------------------------------------------
                                                                        DECEMBER 31
                                                    1996                   1995                   1994
                                             -------------------    -------------------    -------------------
                                                       WEIGHTED-              WEIGHTED-              WEIGHTED-
                                                        AVERAGE                AVERAGE                AVERAGE
                                                       EXERCISE               EXERCISE               EXERCISE
                                             SHARES      PRICE      SHARES      PRICE      SHARES      PRICE
                                             ------    ---------    ------    ---------    ------    ---------
<S>                                          <C>       <C>          <C>       <C>          <C>       <C>
Options outstanding -- beginning of
  year....................................   4,063      $ 14.56     3,540      $ 12.07     2,999      $  9.78
Exercised during the year.................    (480)       10.69      (355)       17.71      (187)        2.65
Forfeitures during the year...............    (216)       20.55       (57)       18.36       (12)       13.17
Granted during the year...................     643        38.78       935        20.04       740        18.91
                                             -----      -------     -----      -------     -----      -------
Outstanding -- end of year................   4,010        18.59     4,063        14.56     3,540        12.07
                                             =====      =======     =====      =======     =====      =======
Eligible for exercise -- end of year......   2,132        12.86     1,209         9.03     1,059         6.02
                                             =====      =======     =====      =======     =====      =======
</TABLE>

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

<TABLE>
<CAPTION>
                                            -----------------------------------------------------------------
                                                     OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                                            -------------------------------------    ------------------------
                                    WEIGHTED-
                                     AVERAGE
                                                           REMAINING    WEIGHTED-                   WEIGHTED-
                                                             LIFE        AVERAGE                     AVERAGE
                                               TOTAL          (IN       EXERCISE        TOTAL       EXERCISE
        RANGE OF EXERCISE PRICES            OUTSTANDING     YEARS)        PRICE      EXERCISABLE      PRICE
- -----------------------------------------   -----------    ---------    ---------    -----------    ---------
<S>                                         <C>            <C>          <C>          <C>            <C>
$1.55 to $6.47...........................      1,013           3.3       $  5.14        1,011        $  5.14
$11.65 to $19.75.........................      1,261           6.9         17.54          492          17.44
$20.00 to $28.88.........................      1,248           8.3         20.97          593          20.79
$31.75 to $44.13.........................        488          10.0         43.14           36          36.31
                                               -----                                    -----
Total....................................      4,010                                    2,132
                                               =====                                    =====
</TABLE>

The Company  accounts for its stock-based  compensation  plans under APB No. 25,
and as a result, no compensation  expense has been recognized in connection with
the options,  as all options  have been  granted  only to AES people,  including
Directors,  with an exercise  price equal to the market  price of the  Company's
common  stock  on the date of  grant.  The  Company  adopted  SFAS  No.  123 for
disclosure  purposes in 1996. For SFAS No. 123 purposes,  the fair value of each
option grant has been estimated as of the date of grant using the  Black-Scholes
option pricing model with the following weighted average assumptions:  risk-free
interest rate of 6.5%,  5.5%, and 7.5% and expected  volatility of 28%, 24%, and
22% for the years ended 1996,  1995 and 1994,  respectively,  a dividend  payout
rate of zero for each year and an expected  option life of 7 years.  Using these
assumptions,  the weighted  average fair value of the stock  options  granted is
$17.61 and $8.17 for 1996 and 1995, respectively. There were no adjustments made
in  calculating  the  fair  value  to  account  for  vesting  provisions  or for
non-transferability or risk of forfeiture.

                                      26
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. STOCKHOLDERS' EQUITY (CONTINUED)

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

<TABLE>
<CAPTION>
                                                              ----------------------
                                                                FOR THE YEARS ENDED
                                                                    DECEMBER 31
                                                              -----------------------
                                                              1996     1995     1994
                                                              -----    -----    -----
            <S>                                               <C>      <C>      <C>
            Net Income:
              As Reported..................................   $ 125    $ 107    $ 100
              Pro forma....................................     121      106      100
            Net income per common share:
              As Reported..................................   $1.62    $1.41    $1.32
              Pro forma....................................    1.57     1.40     1.32
</TABLE>

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

In addition to the options described above, the Company has outstanding warrants
to  purchase up to 0.7  million  shares of its common  stock at $29.43 per share
through  July 2000,  which were issued as partial  settlement  of a  shareholder
class  action suit and were  expensed  in 1995.  Warrants  exercised  under this
settlement were not significant at December 31, 1996.

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

                                      27
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES

Income  Tax  Provision  --  The  provision  for  income  taxes  attributable  to
continuing operations consists of the following (in millions):

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

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

<TABLE>
<CAPTION>
                                                                            --------------------
                                                                            FOR THE YEARS ENDED
                                                                                DECEMBER 31
                                                                            1996    1995    1994
                                                                            ----    ----    ----
<S>                                                                         <C>     <C>     <C>
Statutory federal tax rate...............................................    35%     35%     35%
Change in valuation allowance............................................    (2)     (6)     (2)
State taxes, net of federal tax benefit..................................     6       6       5
Foreign taxes............................................................     2      --      --
Other -- net.............................................................    (1)      3      (4)
                                                                             --      --      --
Effective tax rate.......................................................    40%     38%     34%
                                                                             ==      ==      ==
</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,  but not for  financial  reporting  purposes.
Deferred  income taxes reflect the net tax effects of (a) temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes,  and (b)  operating  loss
and tax credit  carryforwards.  These  items are stated at the enacted tax rates
that are expected to

                                      28
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES (CONTINUED)

be in effect when taxes are actually paid or recovered. Deferred tax assets and
deferred tax liabilities are as follows (in millions):

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

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

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

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

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

9. PROFIT SHARING AND DEFERRED COMPENSATION PLANS

Profit Sharing and Stock  Ownership Plan -- The Company has a profit sharing and
stock ownership plan,  qualified under section 401 of the Internal Revenue Code,
which is  available  to all AES people.  The profit  sharing  plan  provides for
Company matching contributions, other Company contributions at the discretion of
the  Compensation  Committee of the Board of Directors,  and  discretionary  tax
deferred  contributions from the participants.  Participants are fully vested in
their own contributions and the Company's matching  contributions.  Participants
vest in

                                      29
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. PROFIT SHARING AND DEFERRED COMPENSATION PLANS (CONTINUED)

other Company  contributions over a five-year period.  Company  contributions to
the plan were $4 million for each of the years ended 1996, 1995 and 1994.

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

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

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

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

10. QUARTERLY DATA (UNAUDITED)

The following table summarizes the unaudited quarterly  statements of operations
(in millions, except per share amounts):
<TABLE>
<CAPTION>
                                                                -----------------------------------
                                                                        QUARTERS ENDED 1996
                                                                MAR 31    JUN 30    SEP 30    DEC 31
                                                                ------    ------    ------    ------
<S>                                                             <C>       <C>       <C>       <C>
Sales and services...........................................   $ 172     $ 174     $ 205     $ 284
Gross margin.................................................      74        76        85        98
Net income...................................................      29        28        32        36
Net income per share.........................................   $0.38     $0.37     $0.42     $0.46

<CAPTION>
                                                                -----------------------------------
                                                                        QUARTERS ENDED 1995
                                                                MAR 31    JUN 30    SEP 30    DEC 31
                                                                -----     -----     -----     -----
<S>                                                             <C>       <C>       <C>       <C>
Sales and services...........................................   $ 169     $ 166     $ 173     $ 171
Gross margin.................................................      69        69        73        74
Net income...................................................      25        27        27        28
Net income per share.........................................   $0.33     $0.35     $0.36     $0.37
</TABLE>

                                      30
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. GEOGRAPHIC SEGMENTS

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

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

<CAPTION>
                                                                       --------------------------
                                                                          FOR THE YEARS ENDED
                                                                              DECEMBER 31
                                                                        1996      1995      1994
                                                                       ------    ------    ------
<S>                                                                    <C>       <C>       <C>
OPERATING INCOME
North America.......................................................   $  258    $  251    $  245
South America.......................................................       21        14        --
Asia................................................................       (9)       (8)      (11)
Europe..............................................................        8        (4)        2
                                                                       ------    ------    ------
Total...............................................................   $  278    $  253    $  236
                                                                       ======    ======    ======
<CAPTION>
                                                                       --------------------------
                                                                          FOR THE YEARS ENDED
                                                                              DECEMBER 31
                                                                        1996      1995      1994
                                                                       ------    ------    ------
<S>                                                                    <C>       <C>       <C>
IDENTIFIABLE ASSETS
North America.......................................................   $1,831    $1,693    $1,569
South America.......................................................      683       230        46
Asia................................................................      744       328       221
Europe..............................................................      364        90        79
                                                                       ------    ------    ------
Total...............................................................   $3,622    $2,341    $1,915
                                                                       ======    ======    ======
</TABLE>

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

                                      31
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

the  agreements  at the balance  sheet date.  The  estimated  fair values of the
Debentures, 9 3/4% Notes and 10 1/4% Notes are based on the quoted market prices
at December 31, 1996 and 1995.

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

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

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

13. SUBSEQUENT EVENT

In  February  1997,  AES agreed to acquire  the  international  assets of Destec
Energy, Inc. ("Destec") for a total of $407 million (including approximately $42
million of net  monetized  assets).  The purchase  will  include  five  electric
generating  plants and a number of power projects in development.  The plants to
be acquired by AES (with ownership  percentages in parenthesis) include a 110 MW
gas-fired  combined  cycle plant in Kingston,  Canada (50%);  a 405 MW gas-fired
combined cycle plant in Terneuzen,  Netherlands (50%); a 140 MW gas-fired simple
cycle plant in Cornwall,  England (100%);  a 235 MW oil-fired simple cycle plant
in Santo Domingo,  Dominican  Republic (99%);  and a 1600 MW coal-fired plant in
Victoria,   Australia  (20%).   The  acquisition   remains  subject  to  certain
governmental approvals.

                                      32
<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 hereunto duly authorized.


                                             THE AES CORPORATION
                                             -------------------------
                                                   (Registrant)

Date: March 12, 1997                         By /s/ BARRY J. SHARP
                                               -----------------------
                                                    Barry J. Sharp
                             Chief Financial Officer

<PAGE>

                                                                     EXHIBIT 11

THE AES CORPORATION AND SUBSIDIARIES

STATEMENT OF COMPUTATION OF EARNINGS PER SHARE

(In millions, except per share amounts)


<TABLE>
<CAPTION>
                                                        For Years ended December 31
- --------------------------------------------------------------------------------------------------
                                                        1994            1995            1996
<S>                                                     <C>             <C>             <C>
PRIMARY

Weighted Average Number of Shares of Common
   Stock Outstanding                                     74.6            74.9            75.7

Net Effect of Dilutive Stock Options and
   Warrants-Based on the Treasury Stock
   Method Using Average Market Price                      1.0             0.7             1.3

Stock Units Allocated to the Deferred
   Compensation Plans for Executives and
   Directors                                              0.2             0.3             0.3

- --------------------------------------------------------------------------------------------------
   Weighted Average Shares Outstanding                   75.8            75.9            77.3
- --------------------------------------------------------------------------------------------------
   Net Income                                            $100            $107            $125
- --------------------------------------------------------------------------------------------------
   Per Share Amount                                     $1.32           $1.41           $1.62
- --------------------------------------------------------------------------------------------------

FULLY DILUTED

Weighted Average Number of Shares of Common
   Stock Outstanding                                     74.6            74.9            75.7

Net effect of Dilutive Stock Options and
   Warrants - Based on the Treasury Stock
   Method Using Ending Market Price                       1.0             1.0             1.9

Stock Units Allocated to the Deferred
   Compensation Plans for Executives and
   Directors                                              0.2             0.3             0.3

Effect of Convertible Debt - Based on the If-
   Converted Method                                       1.9             1.9             1.3

- --------------------------------------------------------------------------------------------------
   Weighted Average Shares Outstanding                   77.7            78.1            79.2
- --------------------------------------------------------------------------------------------------

   Net Income                                            $100            $107            $125
   Additional Contribution to Net Income if
      Convertible Debt is Fully Converted                   2               2               1
- --------------------------------------------------------------------------------------------------
   Adjusted Net Income                                   $102            $109            $126
- --------------------------------------------------------------------------------------------------
   Per Share Amount                                     $1.31           $1.40           $1.59
- --------------------------------------------------------------------------------------------------
</TABLE>

NOTE: All net income per share and share data have been  adjusted to reflect the
      three percent stock dividend declared February 17, 1994.

<PAGE>

THE AES CORPORATION AND SUBSIDIARIES

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

CALCULATIONS OF RATIO OF EARNINGS TO FIXED CHARGES                   EXHIBIT 12
(in thousand, unaudited)

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

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                          ---------------------------------------------------------------------
                                                             1992            1993           1994          1995           1996
                                                             ----            ----           ----          ----           ----
<S>                                                      <C>             <C>            <C>            <C>            <C>
AS DEFINED:
Income from continuing operations before
  income taxes                                            $  65.2         $  89.4        $ 141.8        $ 163.7        $ 185.3
Adjustment for undistributed income, net
  of distributions                                           (2.5)          (10.6)          (5.9)           3.2          (19.9)
Interest expense                                             97.1           125.0          121.8          121.9          137.7
Depreciation of previously capitalized interest               4.0             4.5            4.5            4.5            4.5
Net amortization of issuance costs                            2.8             2.6            3.5            4.6            5.8
                                                           ------         -------        -------        -------        -------
Earnings                                                  $ 166.6        $  210.9       $  265.7       $  297.9       $  313.4
                                                           ======         =======        =======        =======        =======

Interest expensed and capitalized amounts
  (including construction related fixed charges)          $ 118.2        $  127.0       $  123.9       $  131.9       $  164.7
Net amortization of issuance costs (including
     capitalized amounts)                                     3.1             2.5            3.5            4.6            5.8
                                                           ------         -------        -------        -------        -------
Fixed charges                                             $ 121.3        $  129.5       $  127.4       $  136.5       $  170.5
                                                           ======         =======        =======        =======        =======

Ratio of earnings to fixed charges                           1.37 x         1.63 x         2.08 x         2.18 x         1.84 x

</TABLE>




<PAGE>
                                                                    EXHIBIT 23



INDEPENDENT AUDITORS' CONSENT

We consent to the  incorporation  by reference  in  Registration  Statement  No.
333-15487 of The AES  Corporation  (the  "Company") on Form S-3 of our report on
the consolidated financial statements of the Company as of December 31, 1996 and
1995 and for the three  years in the  period  ended  December  31,  1996,  dated
January 30, 1997, except for Note 13, as to which the date is February 18, 1997,
appearing in this Current Report on Form 8-K of The AES Corporation  dated March
12, 1997. We also consent to the reference to us under the heading  "Experts" in
the  Prospectus  and  Prospectus  Supplement  which  are a part of  Registration
Statement No. 333-15487.

DELOITTE & TOUCHE LLP

Washington, D.C.
March 12, 1997




