Net other expense was $49 million in the quarter compared to net other income of $67 million in the prior year quarter.

Net other income in the 2005 period included $70 million of income from the reversal of a Brazil business tax accrual no longer required. Net other expense in the second quarter of 2006 included $20 million for liquidated damages payable to the electricity offtaker for delays in the construction of 1,200 MW Cartagena power plant in Spain.

Income tax expense rose to $106 million from $80 million, but the effective tax rate fell to 22% from 43% in last year''s second quarter.

The reduction in the effective tax rate was due, in part, to the favorable release of a $43 million valuation allowance at Eletropaulo in Brazil, related to its deferred tax asset for certain pension obligations; decrease in tax expense on unrealized foreign currency gains associated with U.S. dollar debt held at certain Latin American subsidiaries and; decrease in U.S. taxes on distributions from certain non-U.S. subsidiaries due to recent changes in U.S. tax law.

Minority interest expense was $166 million compared to $19 million in the second quarter last year.

The increase resulted principally from higher after tax earnings in Brazil. Comparisons were also impacted by the second quarter 2005 Brazil receivables reserve expense, which reduced minority expense in that period.

Portfolio Management, Restructuring Activities, and Growth

- AES announced that it has reached an agreement with the Brazilian National Development Bank (BNDES) for AES to retain full ownership of AES Sul, a regulated utility serving approximately one million customers in the state of Rio Grande do Sul in southern Brazil, pending finalization of legal documentation. As part of the agreement, BNDES'' call option to acquire a majority economic interest in Sul will be terminated. AES will pay BNDES $15 million and contribute its 100% interest in AES Infoenergy Ltd., a commercial energy trading company, to Brasiliana Energia S.A. (Brasiliana), a holding company jointly owned by AES and BNDES. AES controls Brasiliana through majority ownership of voting shares, while BNDES owns a majority economic interest of 53.85%, including voting and non-voting preferred shares.

- During the quarter, Buffalo Gap, a 121-megawatt wind project in Texas achieved full commercial operations.
- AES announced the acquisition of wind project of 54 megawatts in Tehachapi, California that will close in the third quarter.
- As part of its plan to grow alternative energy business, AES established a joint venture in the area of climate change, which involves creating and selling greenhouse gas offsets called AES AgriVerde which is a partnership with AgCert.
- The company began construction of Maritza East 1, the 670-megawatt lignite-fired project in Bulgaria, in May. This project has a 15 year contract with the National Utility of Bulgaria along with a matching 15 year lignite supply agreement with nearby coal mines.
- The purchaser, BC Hydro, recently accepted AES'' bid on the proposed 184-megawatt coal and biomass plant in British Columbia.
- Last month, the company announced acquisition of majority interest in a UK based wind development company with 640-megawatts of wind projects under development throughout Scotland.
- The company has approximately 100 development projects in 30 countries, at various stages of development.

Segment Financial Highlights

Regulated Utilities Segment

Regulated utilities segment revenue rose 9% to $1,506 million from $1,376 million in the second quarter of 2005.

Excluding the estimated impacts of foreign currency translation, revenue increased approximately 1%, primarily due to higher average prices in North America related to higher fuel charges, largely offset by higher intercompany revenues in Latin America which are eliminated in the segment.

Gross margin increased 264% to $408 million.

This was primarily due to the 2005 Brazil receivables reserve expense and favorable foreign currency translation effects in 2006. Gross margin, as a percent of revenues, rose to 27.1% from 8.1%, primarily due to last year''s receivables reserve expense.

Contract Generation Segment

Contract generation segment revenue rose 21% to $1,199 million from $988 million in the second quarter of 2005.

This was due largely to higher volume in Pakistan and favorable volume and prices in Brazil and Chile, together with the consolidation of Itabo in the Dominican Republic, as a result of an increase in ownership during the quarter. Foreign currency translation effects were not significant in the quarter.

Gross margin improved 18% to $415 million.

This was due principally to higher volume and prices in Brazil and Chile partially offset by higher maintenance expense in the U.S. Gross margin as a percent of revenues decreased to 34.6% from 35.7% primarily due to higher volume in Pakistan and the higher maintenance costs in the U.S.