UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

COMMISSION FILE NUMBER 0-19281

The AES Corporation

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x   No o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes o   No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filter, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x      Accelerated filer o      Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates on June 30, 2005 (based on the closing sale price of $16.38 of the Registrant’s Common Stock, as reported by the New York Stock Exchange on such date) was approximately $10.7 billion.

The number of shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, on March 3, 2006, was 657,601,448.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information from the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 11, 2006 is hereby incorporated by reference into Part III hereof.

THE AES CORPORATION
FISCAL YEAR 2005 FORM 10-K

TABLE OF CONTENTS TO BE UPDATED

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PART I

The AES Corporation, including all its subsidiaries and affiliates are collectively referred to herein as “AES” “the Company,” “us” or “we.”

RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

Subsequent to filing its restated annual report on Form 10-K/A with the Securities Exchange Commission on January 19, 2006, the Company discovered its previously issued restated consolidated financial statements included certain errors in accounting for derivative instruments and hedging activities, minority interest expense and income taxes. The errors in accounting for derivative instruments and hedging activities resulted in differences in previously issued consolidated interim financial statements for certain quarterly periods in 2004 sufficient to require restatement of prior period interim results. The errors in accounting for income taxes and minority interest expense required restatement of previously issued consolidated annual financial statements.

As a result of evaluating these adjustments, the Company reduced its stockholders’ equity by $12 million as of January 1, 2003 as the cumulative effect of the correction of errors for all periods proceeding January 1, 2003, and restated its consolidated statements of operations and cash flows for the years ended December 31, 2004 and 2003 and its consolidated balance sheet as of December 31, 2004.

The restatement adjustments resulted in an increase to previously reported net income of $6 million for the year ended December 31, 2004 and in a decrease to previously reported net income of $17 million for the year ended December 31, 2003. There was no impact on gross margin or net cash flow from operating activities of the Company for any years presented. Based upon management’s review it has been determined that these errors were inadvertent and unintentional. The errors relate to the following areas:

A.              Accounting for Derivative Instruments and Hedging Activities

The Company determined that it failed to perform adequate on-going effectiveness testing for three interest rate cash flow hedges and one foreign currency cash flow hedge during 2004 as required by SFAS No. 133. As a result, the Company should have discontinued hedge accounting and recognized changes in the fair value of the derivative instruments in earnings prospectively from the last valid effectiveness assessment until the earlier of either (1) the expiration of the derivative instrument or (2) the re-designation of the derivative instrument as a hedging activity.

The net impact related to the correction of these errors to previously reported net income resulted in a decrease of $4 million and an increase of $2 million for the years ending December 31, 2004 and 2003, respectively.

B.               Income Tax and Minority Interest Adjustments

As a result of the Company’s year end closing review process, the Company discovered certain other errors related to the recording of income tax liabilities and minority interest expense. The adjustments primarily include:

·       An increase in income tax expense related to the recording of certain historical withholding tax liabilities at one of our El Salvador subsidiaries;

·       An increase in minority interest expense related to a correction of the allocation of income tax expense to minority shareholders. This allocation pertained to certain deferred tax adjustments recorded in the original restatement at one of our Brazilian generating companies. In addition, minority interest expense was also corrected at this subsidiary as a result of identifying differences arising from a more comprehensive reconciliation of prior year statutory financial records to U.S. GAAP financial statements;

·       A reduction of 2004 income tax expense related to adjustments derived from 2004 income tax returns filed in 2005.

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The net impact related to the correction of these errors to previously reported net income resulted in an increase of $10 million and a decrease of $19 million for the years ending December 31, 2004 and 2003, respectively. In addition, the Company restated stockholders’ equity as of January 1, 2003 by $12 million as a correction for these errors in all periods preceding January 1, 2003.

C.               Other Balance Sheet Reclassifications

Certain other balance sheet reclassifications were recorded at December 31, 2004 including a $45 million reclassification which reduced Accounts Receivables and increased Other Current Assets (regulatory assets).

ITEM 1.                 BUSINESS

Overview

AES, a global power company formed in 1981, is a Delaware corporation holding company that through its subsidiaries, operates a portfolio of electricity generation and distribution businesses in 25 countries on five continents.

We operate in two types of businesses within the power sector: first, we generate power for sale to utilities and other wholesale customers; second, we operate utilities that distribute power to retail, commercial, industrial and governmental customers typically through integrated transmission and distribution systems. Each type of business generates approximately one half of the Company’s revenues.

The generation and distribution of electricity are essential services required in all industrialized societies. We are committed to helping meet the world’s need for electricity by supplying power from our existing portfolio, as well as by growing our portfolio through the development and construction of new power plants and through selective acquisitions. We believe that being a large participant in the global power sector gives us the best chance to accomplish our goals. Some of the benefits of being a large organization are the ability to take advantage of scale and to have the resources to develop better operating and management practices to increase overall Company efficiency and productivity. By maintaining a substantial geographic footprint, we are well positioned to pursue opportunities in those markets with favorable characteristics for new investment, namely those having a large and growing need for power. We target specific countries or major geographic regions as areas of primary focus, and seek to build sufficient knowledge and experience in order to increase our ability to successfully compete, and ultimately grow our businesses, in those targeted markets. We believe that this approach also allows us to more efficiently identify and manage the risks inherent in our business.

In addition to our primary business of operating a global power portfolio, we also are engaged in a exploring and promoting a set of related activities that include alternative energy businesses such as wind generation, the supply of liquefied natural gas to certain targeted North American markets, the production of greenhouse gas reduction activities and related industries involving environmental issues and the application of new energy technologies. At present, these initiatives represent growth opportunities for us but currently account for a de minimus amount of revenue and earnings.

Our financial results are reported within three business segments: Contract Generation, Competitive Supply and Regulated Utilities.

Our generation business encompasses our contract generation and competitive supply segments. Performance drivers for our contract generation and competitive supply segments include plant reliability and fuel and fixed cost management. Growth is largely tied to securing new power purchase agreements and expanding capacity. The contract generation and competitive supply segments contributed 37% and 11% of revenues, respectively, for the year 2005.

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Performance drivers for our regulated utilities segment include providing reliable service, managing working capital, obtaining tariff adjustments and appropriate regulatory treatment for new investments and, in developing countries, reduction of commercial and technical losses. The regulated utilities segment contributed 52% of revenues for the year 2005. The revenues and earnings growth of both our generation and utility businesses vary with changes in electricity demand.

Our management structure is divided into four regions: North America; Latin America; Europe, Middle East and Africa (“EMEA”); and Asia, each led by a regional president who reports directly to the Chief Executive Officer (“CEO”). This structure allows us to place senior leaders and resources closer to our businesses around the world to further improve operating performance and integrate operations and development on a more localized level. This helps us leverage regional market trends to enhance our competitiveness and identify and capitalize on key business development opportunities across our lines of business. The Company also maintains a corporate Business Development group which manages large scale transactions such as mergers and acquisitions, and portfolio management, as well as targeted strategic initiatives such as the creation of an alternative energy business.

Operating Segments

See Note 21 to the Consolidated Financial Statements included in Item 8 of this Form 10-K for additional financial information about our business segments as well as information about our geographic operations.

Contract Generation

Our contract generation businesses own and operate plants that sell electricity and related products to utilities or other wholesale customers under long-term contracts. Our contract generation facilities generally limit their exposure to commodity price risks, primarily electricity price volatility and frequently volume risk, by entering into power sales agreements of five years or longer for 75% or more of their output capacity. The remaining terms of these agreements range from 1 to 25 years. These facilities also generally enter into long-term agreements for most of their fuel supply requirements, or they may enter into tolling or “pass through” arrangements in which the counter-party directly assumes the risks associated with providing the necessary fuel and then markets the generated power. Through these types of contractual agreements, our contract generation businesses generally produce more predictable cash flows and earnings. The degree of predictability varies from business to business based on the degree to which their exposure is limited by the contracts they have negotiated with their buyers and fuel suppliers.

Our contract generation segment is comprised of our interests in 76 power generating facilities totaling approximately 23.0 gigawatts of capacity located in 17 countries. This includes minority interests in 28 power generation facilities totaling over 2.0 gigawatts of capacity. In addition, there are three plants under construction in three countries which, when completed, will add a total capacity of approximately 1.4 gigawatts to our contract generation segment. AES also operates, under either management or operations and maintenance agreements, 377 MW of wind generation facilities in the U.S. Of the 23.0 gigawatts of current operating capacity, 50% is derived from gas-fired facilities, 28% from coal-fired facilities, 13% from hydro facilities, 7% from oil-fired facilities, 2% from wind facilities, and less than 1% from biomass facilities.

In most of our contract generating businesses, a single customer contracts for most or all of a particular facility’s generated power. To reduce the resulting counter-party credit risk, we seek to contract with creditworthy customers. We also seek to obtain sovereign government guarantees of the customer’s obligations. However, we do business with many customers in many countries where neither the customer nor the government has investment grade ratings. We believe that locating our plants in different geographic areas helps to mitigate the effects of regional economic downturns, thereby offsetting some of

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the risks associated with operating in less developed countries. Additionally, in countries in which we own distribution companies, our contract generation businesses seek to contract with the distribution companies that we control.

Certain of our subsidiaries and affiliates are in various stages of developing and constructing new power plants (known as “greenfield power plants” or “greenfield”). Some have signed long-term contracts or made similar arrangements for the sale of electricity. During 2005, the Company made significant progress on important growth projects. Among these plants under construction, the Company’s 120 MW Buffalo Gap wind power project in Texas began commercial operations in 2006. The Company’s 1,200 MW gas-fired power plant in Cartagena, Spain is scheduled for completion in 2006. The Company’s new 120 MW Los Vientos diesel-fired peaking facility which will serve the largest power market in Chile, is expected to be on-line in the second quarter of 2006. We currently believe that our costs related to these projects are recoverable but can provide no assurance that we will complete these projects and/or that these projects will reach commercial operation.

In the contract generation segment, we face most of our competition prior to the execution of a power sales agreement during the development phase of a project. Our competitors in this business include other independent power producers and equipment manufacturers, as well as various utilities and their affiliates. During the operational phase, we traditionally have faced limited competition in this segment due to the long-term nature of the generation contracts. However, since competitive power markets have been introduced and new market participants have been added, we will encounter increased competition in attracting new customers and maintaining our current customers as our existing contracts expire.

Competitive Supply

Our competitive supply businesses own and operate plants that sell electricity to wholesale customers in competitive markets. These plants typically sell into local power pools under short-term (less than one year) contracts or into daily spot markets. Demand can be affected by weather, electricity transmission constraints, fuel prices and competition. This business segment offers more varied sales, earnings and cash flows than our other segments.

In contrast to the contract generation segment discussed above, these facilities generally sell less than 75% of their output under long-term contracts. The prices at which these facilities sell electricity under short-term contracts and in the spot electricity markets are unpredictable and can be volatile. In addition, our operational results in this segment are more sensitive to the impact of market fluctuations in the price of natural gas, coal, oil and other fuels. These businesses also have more significant needs for working capital or credit to support their operations than our businesses in the contract generation segment.

Our competitive supply segment is comprised of 27 power generation facilities totaling approximately 13 gigawatts of capacity located in 7 countries. Of the total 13 gigawatts of current operating capacity, 59% is derived from coal-fired facilities, 8% from gas-fired facilities, 29% from hydro facilities, 2% from oil facilities, 1% from petroleum coke facilities and less than 1% from biomass facilities. In November 2005, we completed an output upgrade of the Alicura facility in Argentina, which resulted in an additional 10 MW of capacity.

The absence of long-term contracts makes future production volumes uncertain, which in turn makes it difficult to forecast the amount of fuel needed to support those volumes. As a result, competitive supply businesses are exposed to volume risk in connection with their purchases of natural gas, coal and other raw materials. Where appropriate, we have hedged a portion of our financial performance against the effects of fluctuations in energy commodity prices using such strategies as commodity forward contracts, futures, swaps and options.

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Although we maintain credit policies with regard to our counterparties, there can be no assurance that ultimately they will be able to fulfill their contractual obligations. Volatility in electricity markets causes increases in credit risk, a decline in the number and quality of market participants with strong credit ratings and considerably less liquidity in energy markets.

We compete in this segment with numerous other independent power producers, energy marketers and traders, energy merchants, transmission and distribution providers and retail energy suppliers. Competitive factors in this segment include reliability, operational cost and third party credit requirements.

Regulated Utilities

Our regulated utilities business segment consists of 14 distribution companies in seven countries with approximately 11 million customers. Our regulated utilities aggregate approximately 7.0 gigawatts of generation capacity with annual sales of over 82 gigawatt hours. All of these companies maintain a monopoly franchise within a defined service area. This segment is composed of three integrated utilities, one located in the U.S. (Indianapolis Power & Light Company, or “IPL”), one in Venezuela (EDC) and one in Cameroon (AES SONEL) and electricity distribution businesses located in Argentina (EDELAP, EDEN and EDES), Brazil (AES Eletropaulo and AES Sul), El Salvador (CAESS, CLESA, DEUSEM and EEO), and Ukraine (Kievoblenergo and Rivneenergo). These utilities sell electricity under regulated tariff agreements and each has transmission and distribution capabilities; IPL, EDC, and AES SONEL also have generation plants. Our regulated utilities are subject to extensive regulation at multiple governmental levels relating to ownership, marketing, delivery and pricing of electricity and gas, with a focus on protecting customers. Regulated utilities revenues result primarily from retail electricity sales to customers under regulated tariff or concession agreements, long term electricity sale concessions granted by the appropriate governmental authorities and, to a lesser extent, from contractual agreements of varying lengths and provisions. Our three largest regulated utilities businesses (further described below), which account for approximately 67% of the gigawatt-hours distributed by our regulated utilities, are IPALCO Enterprises, Inc., AES Eletropaulo and EDC.

IPALCO Enterprises Inc. (“IPALCO”) is a holding company and its principal subsidiary is IPL. IPL is engaged in generating, transmitting, distributing and selling electric energy to approximately 460,000 customers in the city of Indianapolis and neighboring areas within the state of Indiana. IPL owns and operates four generation facilities. Two generating facilities are primarily coal-fired plants. The third facility has a combination of units that use coal (base load capacity) and natural gas and/or oil (peaking capacity). The fourth facility is a small peaking station that uses gas-fired combustion turbine technology. IPL’s net generation winter capability is 3,370 MW and net summer capability is 3,252 MW. We acquired IPALCO in March 2001.

AES Eletropaulo has served the São Paulo, Brazil area for over 100 years and with over five million customers, is the largest electricity distribution company in the Americas in terms of customers. AES Eletropaulo’s concession contract with the Brazilian National Electric Energy Agency (“ANEEL”), the government agency responsible for regulating the Brazilian electric industry, entitles AES Eletropaulo to distribute electricity in its service area for 30 years from the date of our acquisition in 1998. AES Eletropaulo’s service territory consists of 24 municipalities in the greater São Paulo metropolitan area and adjacent regions that account for approximately 15% of Brazil’s GDP, covering more than 5 million customers or 44% of the population in the State of São Paulo, Brazil.

EDC was founded in 1895 and is the largest private-sector electric utility in Venezuela serving approximately one million customers. EDC generates, transmits and distributes electricity to customers in metropolitan Caracas and its surrounding area. EDC’s distribution area covers 5,176 square kilometers. EDC has an installed generating capacity of 2,616 MW. EDC commenced construction of a new 200 MW

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gas-fired generation plant. This project is expected to start-up in 2007 and will support continued demand growth at this regulated utility.

Electricity sales are made under regulated tariff agreements or under existing regulatory laws and provisions. For utilities located in developing countries, the local business environment also provides for significant opportunities to implement operating improvements that may stimulate growth in earnings and cash flow performance. These growth rates may be greater than those typically achievable in our other business segments and at utilities in more developed countries. Many of these businesses face challenges unique to developing countries including outdated equipment, significant electricity theft-related losses, cultural problems associated with customer safety and non-payment, emerging economies and potentially less stable governments or regulatory regimes.

The regulated utilities face relatively little direct competition due to significant barriers to entry which are present in these markets. In this segment, we primarily face competition in our efforts to acquire businesses. We compete against a number of other participants, some of which have greater financial resources, have been engaged in distribution related businesses for periods longer than we have, and have accumulated more significant portfolios. Relevant competitive factors include financial resources, governmental assistance, and access to non-recourse financing and regulatory restrictions. In certain locations, utilities face increased competition as a result of changes in laws and regulations which allow wholesale and retail services to be provided on a competitive basis. We can provide no assurance that deregulation will not adversely affect our regulated utilities’ future operations, cash flows and financial condition. The results of operations of our utilities business are sensitive to changes in economic growth and regulation (especially in emerging markets), abnormal weather conditions affecting each local market, as well as the success of the operational changes that have been implemented.

Facilities

The following tables present information with respect to the facilities in each of our three business segments. The amounts under “Gross MW” and “Approximate Gigawatt Hours” represent the gross amounts for each facility without regard to our percentage of ownership interest in the facility.

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Contract Generation
(As of December 31, 2005)

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Contract Generation—continued
(As of December 31, 2005)

Under Construction

(1)          As of March 2006, AES sold its direct interest in Kingston Cogeneration Limited Partnership, a 110 MW cogeneration power plant.

(2)          Gener-Centrogener plants: Ventanas, Laguna Verde, Laguna Verde Turbogas, Alfalfal, Maitenas, Queltehues and Volcán.

(3)          Gener-Eletrica de Santiago plants: Nueva Renca and Renca.

(4)          Gener-Energia Verde Plants: Constitución, Laja and San Francisco de Mostazal.

(5)          Itabo plants: Itabo, Santo Domingo, Timbeque, Los Mina and Higuamo.

(6)          Tietê plants: Água Vermelha, Bariri, Barra Bonita, Caconde, Euclides da Cunha, Ibitinga, Limoeiro, Mogi-Guaçu, Nova Avanhandava and Promissão.

(7)          As a result of the restructuring between some of our Brazilian holding companies and BNDES which was completed in January 2004, we have a 46% ownership interest in AES Uruguaiana and a 24% interest in AES Tietê. AES retains control of these entities through  the holding company, Brasiliana Energia, S.A.

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Competitive Supply
(As of December 31, 2005)

(1)          Although our equity interest in these businesses is zero, we operate these businesses through a management agreement.

(2)          AES fully owns and operates Maikuben West coal mine in Kazakhstan, which supplies coal to this facility.

(3)          Although our equity interest in these businesses is zero, we operate these businesses through a concession agreement.

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Regulated Utilities
(As of December 31, 2005)

(1)          IPL plants: Eagle Valley, Georgetown, Harding Street and Petersburg.

(2)          EDC plants: Amplicacion Tacoa, Tacoa, Arrecifes, Oscar Augusto Machado and Genevapca.

(3)          SONEL plants: Edéa, Song Loulou, Limbé, Bassa, Bafoussam, Logbaba, Logbaba II, Oyomabang I Oyomabang II, Mefou, Lagdo and Djamboutou.

Under Construction