The Company is exposed to market risks associated with its enterprise-wide business activities, namely the purchase and sale of fuel and electricity as well as foreign currency risk and interest rate risk. In order to manage the market risks associated with these business activities, we enter into contracts that incorporate derivatives and financial instruments, including forwards, futures, options, swaps or combinations thereof, as appropriate. The Company applies hedge accounting for all contracts as long as they are eligible under the accounting standards for derivatives and hedging. While derivative transactions are not entered into for trading purposes, some contracts are not eligible for hedge accounting.

AES and its subsidiaries utilize variable rate debt financing for construction projects and operations, resulting in an exposure to interest rate risk. Interest rate swap, cap and floor agreements are entered into to manage interest rate risk by effectively fixing or limiting the interest rate exposure on the underlying financing. These interest rate contracts range in maturity through 2027, and are typically designated as cash flow hedges. The following table sets forth, by underlying type of interest rate index, the Company's current and maximum outstanding notional under its interest rate derivative instruments, the weighted average remaining term and the percentage of variable-rate debt hedged that is based on the related index as of December 31, 2010 regardless of whether the derivative instruments are in qualifying cash flow hedging relationships:

		December 31, 2010
		Current			Maximum⁽¹⁾
			Derivative			Derivative		Weighted	% of Debt
			Notional			Notional		Average	Currently
		Derivative	Translated		Derivative	Translated		Remaining	Hedged
Interest Rate Derivatives		Notional	to USD		Notional	to USD		Term⁽¹⁾	by Index⁽²⁾

		(in millions)						(in years)
LIBOR (U.S. Dollar)		2,543	$	2,543	2,671	$	2,671	10	69%
EURIBOR (Euro)		1,233		1,651	1,233		1,651	13	72%
LIBOR (British Pound Sterling)		44		68	44		68	10	69%
Securities Industry and Financial Markets
	Association Municipal Swap Index
	(U.S. Dollar)	40		40	40		40	12	N/A⁽³⁾

(1) The Company's interest rate derivative instruments primarily include accreting and amortizing notionals. The maximum derivative notional represents the largest notional at any point between December 31, 2010 and the maturity of the derivative instrument, which includes forward starting derivative instruments. The weighted average remaining term represents the remaining tenor of our interest rate derivatives weighted by the corresponding maximum notional.

(2) Excludes variable-rate debt tied to other indices where the Company has no interest rate derivatives.

(3) The debt that was being hedged is no longer exposed to variable interest payments, because it is now held on IPL's behalf and no longer bears interest.

Cross currency swaps are utilized in certain instances to manage the risk related to fluctuations in both interest rates and certain foreign currencies. These cross currency contracts range in maturity through 2028. The following table sets forth, by type of foreign currency denomination, the Company's outstanding notional of its cross currency derivative instruments as of December 31, 2010 which are all in qualifying cash flow hedge relationships. These swaps are amortizing and therefore the notional amount represents the maximum outstanding notional as of December 31, 2010:

(1) Represents the remaining tenor of our cross currency swaps weighted by the corresponding notional.

(2) Represents the proportion of foreign currency denominated debt hedged by the same foreign currency denominated notional of the cross currency swap.

We are exposed to foreign currency risk as a result of our investments in foreign subsidiaries and affiliates. AES operates businesses in many foreign environments and such operations in foreign countries may be impacted by significant fluctuations in foreign currency exchange rates. Foreign currency options and forwards are utilized, where possible, to manage the risk related to fluctuations in certain foreign currencies. These foreign currency contracts range in maturity through 2011. The following tables set forth, by type of foreign currency denomination, the Company's outstanding notional over the remaining terms of its foreign currency derivative instruments as of December 31, 2010 regardless of whether the derivative instruments are in qualifying hedging relationships:

	December 31, 2010
						Weighted
		Notional		Probability		Average
		Translated		Adjusted		Remaining
Foreign Currency Options	Notional⁽¹⁾	to USD⁽¹⁾		Notional⁽²⁾		Term⁽³⁾

	(in millions)					(in years)
Brazilian Real (BRL)	208	$	120	$	30	<1
Euro (EUR)	15		21		18	<1
Philippine Peso (PHP)	266		6		1	<1
British Pound (GBP)	3		4		2	<1

(2) Represents the gross notional amounts times the probability of exercising the option, which is based on the relationship of changes in the option value with respect to changes in the price of the underlying currency.

(3) Represents the remaining tenor of our foreign currency options weighted by the corresponding notional.

(1) Represents the remaining tenor of our foreign currency forwards weighted by the corresponding notional.

In addition, certain of our subsidiaries have entered into contracts which contain embedded derivatives that require separate valuation and accounting due to the fact that the item being purchased or sold is denominated in a currency other than the functional currency of that subsidiary or the currency of the item. These contracts range in maturity through 2025. The following table sets forth, by type of foreign currency denomination, the Company's outstanding notional over the remaining terms of its foreign currency embedded derivative instruments as of December 31, 2010:

	December 31, 2010
				Weighted
		Notional		Average
		Translated		Remaining
Embedded Foreign Currency Derivatives	Notional	to USD		Term⁽¹⁾

	(in millions)			(in years)
Philippine Peso (PHP)	21,176	$	484	3
Kazakhstani Tenge (KZT)	31,084		210	10
Argentine Peso (ARS)	331		83	9
Euro (EUR)	28		38	4
Brazilian Real (BRL)	19		11	1
Cameroon Franc (XAF)	1,755		4	2

(1) Represents the remaining tenor of our foreign currency embedded derivatives weighted by the corresponding notional.

We are exposed to the impact of market fluctuations in the price of electricity, fuel and environmental credits. Although we primarily consist of businesses with long-term contracts or retail sales concessions (which provide our distribution businesses with a franchise to serve a specific geographic region), a portion of our current and expected future revenues are derived from businesses without significant long-term purchase or sales contracts. These businesses subject our results of operations to the volatility of prices for electricity, fuel and environmental credits in competitive markets. We have used a hedging strategy, where appropriate, to hedge our financial performance against the effects of fluctuations in energy commodity prices. The implementation of this strategy can involve the use of commodity forward contracts, futures, swaps and options. Some of our businesses hedge certain aspects of their commodity risks using financial hedging instruments, as described below.

We also enter into short-term contracts for electricity and fuel in other competitive markets in which we operate. When hedging the output of our generation assets, we have power purchase agreements or other hedging instruments that lock in the spread in dollars per MWh between the cost of fuel to generate a unit of electricity and the price at which the electricity can be sold (“Dark Spread” where the fuel is coal). The portion of our sales and fuel purchases that are not subject to such agreements will be exposed to commodity price risk.

The PPAs and fuel supply agreements entered into by the Company are evaluated to determine if they meet the definition of a derivative or contain embedded derivatives, either of which require separate valuation and accounting. To be a derivative under the accounting standards for derivatives and hedging, an agreement would need to have a notional and an underlying, require little or no initial net investment and could be net settled. Generally, these agreements do not meet the definition of a derivative, often due to the inability to be net settled. On a quarterly basis, we evaluate the markets for the commodities to be delivered under these agreements to determine if facts and circumstances have changed such that the agreements could then be net settled and meet the definition of a derivative.

Nonetheless, certain of the PPAs and fuel supply agreements entered into by certain of the Company's subsidiaries are derivatives or contain embedded derivatives requiring separate valuation and accounting. These agreements range in maturity through 2024. The following table sets forth by type of commodity the Company's outstanding notionals for the remaining term of its commodity derivative and embedded derivative instruments as of December 31, 2010:

	December 31, 2010
		Weighted Average
Commodity Derivatives	Notional	Remaining Term⁽¹⁾
	(in millions)	(in years)
Natural gas (MMBtu)	34	12
Petcoke (Metric tons)	14	14
Aluminum (MWh)	17⁽³⁾	9
Certified Emission Reductions (CER)	1	2
Financial transmission rights (MW)	-⁽²⁾	<1

(1) Represents the remaining tenor of our commodity and embedded derivatives weighted by the corresponding volume.

(3) Our exposure is to fluctuations in the price of aluminum while the notional is based on the amount of power we sell under the PPA.

In addition, as part of the settlement agreements terminating the gas transportation contracts with Gasoducto GasAndes (Argentina) S.A. and Gasoducto GasAndes (Chile) S.A. discussed in Note 12—Contingencies, we have an embedded derivative related to the dividends that could result from our 13% ownership in these two gas transportation companies.

The following table sets forth the Company's derivative instruments as of December 31, 2010 and 2009 by type of derivative and by level within the fair value hierarchy. Derivative assets and liabilities are recognized at their fair value. Derivative assets and liabilities are combined with other balances and included in the following captions in our Consolidated Balance Sheets: current derivative assets in other current assets, noncurrent derivative assets in other noncurrent assets, current derivative liabilities in accrued and other liabilities and long-term derivative liabilities in other long-term liabilities.

				December 31, 2010								December 31, 2009
				Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total

				(in millions)								(in millions)
Assets
Current assets:
	Foreign currency derivatives			$	-	$	4⁽¹⁾	$	3	$	7	$	-	$	6	$	-	$	6
	Commodity and other derivatives				-		2		3		5		-		1		28		29
		Total current assets			-		6		6		12		-		7		28		35
Noncurrent assets:
	Interest rate derivatives				-		49		-		49		-		83		2		85
	Foreign currency derivatives				-		4⁽¹⁾		27		31		-		-		-		-
	Cross currency derivatives				-		-		12		12		-		-		-		-
	Commodity and other derivatives				-		4		16		20		-		-		-		-
		Total noncurrent assets			-		57		55		112		-		83		2		85
			Total assets	$	-	$	63	$	61	$	124	$	-	$	90	$	30	$	120

Liabilities
Current liabilities:
	Interest rate derivatives			$	-	$	137⁽¹⁾	$	-	$	137	$	-	$	118	$	7	$	125
	Cross currency derivatives				-		-		2		2		-		-		-		-
	Foreign currency derivatives				-		13		-		13		-		3		-		3
	Commodity and other derivatives				-		-		-		-		-		-		2		2
		Total current liabilities			-		150		2		152		-		121		9		130
Long-term liabilities:
	Interest rate derivatives				-		246⁽¹⁾		1		247		-		150		7		157
	Cross currency derivatives				-		-		-		-		-		-		12		12
	Foreign currency derivatives				-		15		8		23		-		2		-		2
	Commodity and other derivatives				-		-		1		1		-		-		2		2
		Total long-term liabilities			-		261		10		271		-		152		21		173
			Total liabilities	$	-	$	411	$	12	$	423	$	-	$	273	$	30	$	303

(1) Includes the impact of consolidating Cartagena beginning January 1, 2010 under VIE accounting guidance as follows: $1 million of current assets and $4 million of noncurrent assets on foreign currency derivatives and $19 million of current liabilities and $46 million of long-term liabilities for interest rate derivatives as of December 31, 2010.

The following table sets forth the fair value and balance sheet classification of derivative instruments as of December 31, 2010 and 2009:

			December 31, 2010						December 31, 2009
					Not						Not
			Designated		Designated				Designated		Designated
			as Hedging		as Hedging				as Hedging		as Hedging
			Instruments		Instruments		Total		Instruments		Instruments		Total

			(in millions)						(in millions)
Assets
Other current assets:
	Foreign currency derivatives		$	-	$	7⁽¹⁾	$	7	$	-	$	6	$	6
	Commodity & other derivatives			-		5		5		1		28		29
		Total other current assets		-		12		12		1		34		35

Other assets:
	Interest rate derivatives			49		-		49		85		-		85
	Foreign currency derivatives			-		31⁽¹⁾		31		-		-		-
	Cross currency derivatives			12		-		12		-		-		-
	Commodity & other derivatives:			-		20		20		-		-		-
		Total other assets - noncurrent		61		51		112		85		-		85
Total assets			$	61	$	63	$	124	$	86	$	34	$	120

Liabilities
Accrued and other liabilities:
	Interest rate derivatives		$	126⁽¹⁾	$	11	$	137	$	115	$	10	$	125
	Cross currency derivatives			2		-		2		-		-		-
	Foreign currency derivatives			8		5		13		2		1		3
	Commodity & other derivatives			-		-		-		-		2		2
		Total accrued and other liabilities		136		16		152		117		13		130

Other long-term liabilities:
	Interest rate derivatives			232⁽¹⁾		15		247		141		16		157
	Cross currency derivatives			-		-		-		12		-		12
	Foreign currency derivatives			-		23		23		-		2		2
	Commodity & other derivatives			-		1		1		-		2		2
		Total other long-term liabilities		232		39		271		153		20		173
Total liabilities			$	368	$	55	$	423	$	270	$	33	$	303

The Company has elected not to offset net derivative positions in the financial statements. Accordingly, the Company does not offset such derivative positions against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements. At December 31, 2010 and 2009, we held no cash collateral that we received from counterparties to our derivative positions. As we have not received collateral, our derivative assets are exposed to the credit risk of the respective counterparty and, due to this credit risk, the fair value of our derivative assets (as shown in the above two tables) have been reduced by a credit valuation adjustment. Also, at December 31, 2010 and 2009, we had no cash collateral posted with (held by) counterparties to our derivative positions.

The table below sets forth the pre-tax accumulated other comprehensive income (loss) expected to be recognized as an increase (decrease) to income from continuing operations before income taxes over the next twelve months as of December 31, 2010 for the following types of derivative instruments:

The balance in accumulated other comprehensive loss related to derivative transactions will be reclassified into earnings as interest expense is recognized for interest rate hedges and cross currency swaps, as depreciation is recognized for interest rate hedges during construction, as foreign currency transaction gains and losses are recognized for hedges of foreign currency exposure, and as electricity sales and fuel purchases are recognized for hedges of forecasted electricity and fuel transactions. These balances are included in the consolidated statements of cash flows as operating and/or investing activities based on the nature of the underlying transaction.

For the years ended December 31, 2010, 2009 and 2008, pre-tax gains (losses) of $(1) million, $0 million, and $(1) million net of noncontrolling interests, respectively, were reclassified into earnings as a result of the discontinuance of a cash flow hedge because it was probable that the forecasted transaction would not occur by the end of the originally specified time period (as documented at the inception of the hedging relationship) or within an additional two-month time period thereafter.

The following table sets forth the pre-tax gains (losses) recognized in accumulated other comprehensive loss (“AOCL”) and earnings related to the effective portion of derivative instruments in qualifying cash flow hedging relationships, as defined in the accounting standards for derivatives and hedging, for the years ended December 31, 2010 and 2009:

		Gains (Losses)						Gains (Losses) Reclassified
		Recognized in AOCL				Consolidated		from AOCL into Earnings
		2010		2009		Statement of Operations		2010		2009

		(in millions)						(in millions)
Interest rate derivatives		$	(243)⁽³⁾	$	49	Interest expense		$	(108)⁽¹⁾	$	(72)⁽¹⁾
						Non-regulated cost of sales			(2)		-
						Net equity in earnings of
							affiliates		(1)		-⁽²⁾
Cross currency derivatives			11		48	Interest expense			(1)		2
						Foreign currency transaction
							gains (losses)		-		43
Foreign currency derivatives			(9)		2	Foreign currency transaction
							gains (losses)		(3)		-⁽²⁾
Commodity derivatives -
	electricity		(8)		120	Non-regulated revenue			-⁽⁴⁾		3⁽⁴⁾
Total		$	(249)	$	219			$	(115)	$	(24)

(1) Includes amounts that were reclassified from AOCL related to derivative instruments that previously, but no longer, qualify for cash flow hedge accounting. Excludes $(113) million and $(35) million related to discontinued operations for the years ended December 31, 2010 and 2009, respectively.

(3) Includes $(29) million related to Cartagena for the year ended December 31, 2010, which was consolidated prospectively beginning January 1, 2010 under VIE accounting guidance.

(4) Excludes $11 million and $190 million related to discontinued operations for the years ended December 31, 2010 and 2009, respectively.

Amounts recognized in AOCL due to derivative instruments that currently are, or previously were (but no longer are) qualifying cash flow hedging relationships, as defined in the accounting standards for derivatives and hedging, after income taxes, during the year ended December 31, 2008 are as follows:

The following table sets forth the pre-tax gains (losses) recognized in earnings related to the ineffective portion of derivative instruments in qualifying cash flow hedging relationships, as defined in the accounting standards for derivatives and hedging, for the years ended December 31, 2010 and 2009:

		Gains (Losses)
	Classification in	Recognized in Earnings
	Consolidated Statement of Operations	2010		2009

		(in millions)
Interest rate derivatives	Interest expense	$	(15)	$	(8)
	Net equity in earnings of affiliates		-⁽¹⁾		(1)
Cross currency derivatives	Interest expense		5		(11)
Foreign currency derivatives	Foreign currency transaction
	gains (losses)		-⁽¹⁾		-⁽¹⁾
Total		$	(10)	$	(20)

The Company recognized after-tax losses of $45 million, net of noncontrolling interests, related to the ineffective portion of derivative instruments in qualifying cash flow hedging relationships, as defined in the accounting standards for derivatives and hedging, for the year ended December 31, 2008.

The following table sets forth the pre-tax gains (losses) recognized in earnings related to derivative instruments not designated as hedging instruments under the accounting standards for derivatives and hedging, for the years ended December 31, 2010 and 2009:

	Classification		Gains (Losses)
	in Consolidated		Recognized in Earnings
	Statement of Operations		2010		2009

			(in millions)
Interest rate derivatives	Interest expense		$	(7)	$	(25)
Foreign exchange derivatives	Foreign currency transaction
		gains (losses)		(36)		(38)
	Net equity in earnings of
		affiliates		(2)		-⁽¹⁾
Commodity & other derivatives	Non-regulated revenue			21		1
	Non-regulated cost of sales			5		(30)
	Net equity in earnings of
		affiliates		-⁽¹⁾		-⁽¹⁾
Total			$	(19)	$	(92)

The Company recognized after-tax gains of $11 million net of noncontrolling interests related to the changes in fair value of derivative instruments not in qualifying cash flow hedging relationships, as defined in the accounting standards for derivatives and hedging, for the year ended December 31, 2008.

In addition, IPL has two derivative instruments for which the gains and losses are accounted for in accordance with accounting standards for regulated operations, as regulatory assets or liabilities. Gains and losses on these derivatives due to changes in the fair value of these derivatives are probable of recovery through future rates and are initially recognized as an adjustment to the regulatory asset or liability and recognized through earnings when the related costs are recovered through IPL's rates. Therefore, these gains and losses are excluded from the above table. The following table sets forth the change in regulatory assets and liabilities resulting from the change in the fair value of these derivatives for the years ended December 31, 2010 and 2009:

Gener, our generation business in Chile, has a cross currency swap agreement with a counterparty to swap Chilean inflation indexed bonds issued in December 2007 into U.S. Dollars. The derivative agreements contain credit contingent provisions which would permit the counterparties with which Gener is in a net liability position to require collateral credit support when the fair value of the derivatives exceeds the unsecured thresholds established in the agreement. These thresholds vary based on Gener's credit rating. If Gener's credit rating were to fall below the minimum threshold established in the swap agreements, the counterparties can demand immediate collateralization of the entire mark-to-market value of the swaps (excluding credit valuation adjustments) if Gener is in a net liability position. The mark-to-market value of the swaps was in a net asset position at December 31, 2010, and in a net liability position of $12 million at December 31, 2009. Gener posted zero and $25 million, respectively, in the form of a letter of credit to support these swaps.