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The fair value of current financial assets and liabilities, debt service reserves and other deposits is estimated to be equal to their reported carrying amounts. The fair value of non-recourse 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 quoted market prices or discounted cash flow analyses. See Note 10—Debt for additional information on the fair value and carrying value of debt. The fair value of interest rate swap, cap and floor agreements, foreign currency forwards, swaps and options, and energy derivatives is the estimated net amount that the Company would receive or pay to sell or transfer agreements as of the balance sheet date.

The estimated fair values of the Company’s assets and liabilities have been determined using available market information. By virtue of these amounts being estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

In general, the Company’s nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis include goodwill; intangible assets, such as sales concessions, land rights and emissions allowances; and long-lived tangible assets including property, plant and equipment. The Company

recognized material goodwill impairment during the year ended December 31, 2009 as a result of the annual goodwill impairment evaluation as of October 1, but this impairment was not a result of the adoption of the new fair value measurement provisions. This is further described in Note 8—Goodwill and Other Intangible Assets. Although the adoption of the new fair value measurement and disclosure accounting guidance did not materially impact our financial condition, results of operations or cash flows, additional disclosures about fair value measurements are included in this Form 10-K.

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The following table summarizes the carrying and fair value of certain of the Company’s financial assets and liabilities as of December 31, 2009 and 2008:

December 31, 2009 2008 Carrying Amount Fair Value Carrying Amount Fair Value (in millions) Assets Marketable securities(1) $ 1,691 $ 1,691 $ 1,413 $ 1,413 Derivatives(2) 141 141 350 350 Total assets $ 1,832 $ 1,832 $ 1,763 $ 1,763 Liabilities Debt(3) $ 19,916 $ 20,387 $ 17,690 $ 15,249 Derivatives(2) 350 350 504 504 Total liabilities $ 20,266 $ 20,737 $ 18,194 $ 15,753

(1) _{See Note 4—Investments in Marketable Securities for additional information regarding the classification of marketable securities in the Fair Value}

Hierarchy.

(2) _{See Note 5—Derivative Instruments and Hedging Activities for additional information regarding the fair value of derivatives.} (3) _{See Note 10—Debt for additional information regarding the fair value of the Company’s recourse and non-recourse debt.}

Valuation Techniques:

The fair value measurement accounting guidance describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset. The Company does not currently determine the fair value of any of our financial assets and liabilities using the cost approach. Financial assets and liabilities that are measured at fair value on a recurring basis at AES fall into two broad categories: investments and derivatives.

Our investments are generally measured at fair value using the market approach and our derivatives are valued using the income approach.

Investments

The Company’s investments measured at fair value generally consist of marketable debt and equity securities. Equity securities are adjusted to fair value using quoted market prices. Debt securities primarily consist of unsecured debentures, certificates of deposit and government debt securities held by our Brazilian subsidiaries. The implementation of the fair value measurement guidance did not result in a material change in the fair value of these investments due to the fact that these investments are primarily issued by highly-rated institutions and governmental agencies and therefore, the consideration of counterparty credit risk did not have a

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material impact on the determination of fair value. Returns and pricing on these instruments are generally indexed to the CDI (Brazilian equivalent to LIBOR), Selic (overnight borrowing rate) or IGPM (inflation) rates in Brazil and are adjusted based on the banks’ assessment of the specific businesses. Fair value is determined based on comparisons to market data obtained for similar assets and are considered Level 2 inputs. The Company holds some auction rate securities through IPL. The fair value of these securities was $2 million as of December 31, 2009. Based on the current credit environment, these were evaluated for potential impairment and were determined to not be impaired at this time. For more detail regarding the fair value of investments see Note 4—Investments in Marketable Securities.

Derivatives

When deemed appropriate, the Company manages its risk from interest and foreign currency exchange rate and commodity price fluctuations through the use of financial and physical derivative instruments. The Company’s derivatives are primarily interest rate swaps to hedge non-recourse debt to establish a fixed rate on variable rate debt, foreign exchange instruments to hedge against currency fluctuations, commodity derivatives to hedge against fluctuations in

commodity prices, and embedded derivatives associated with commodity contracts. The Company’s subsidiaries are counterparties to various interest rate swaps, interest rate options, foreign currency swaps and commodity and embedded derivatives in certain agreements, generally PPAs. The fair value of our derivative portfolio was determined using internal valuation models, most of which are based on observable market inputs including interest rate curves and forward and spot prices for currencies and commodities. The primary pricing inputs used in determining the fair value of our interest rate swaps and our foreign currency exchange swaps are forward LIBOR curves and forward foreign exchange curves with the same duration as the instrument as reported in published information provided by pricing services. For each derivative, the projected forward curves are used to determine the stream of cash flows over the remaining term of the contract. The cash flows are then discounted using a spot discount rate to determine the fair value. To the extent that management can estimate the fair value of these assets or liabilities without the use of significant unobservable inputs, these derivatives are included in Level 2.

In certain instances, the published curve may not extend through the remaining term of the contract and management must make assumptions to extrapolate the curve which result in the use of unobservable inputs. In certain instances the financial or physical instrument is traded in an inactive market requiring us to use unobservable inputs. Additionally, in certain instances the nonperformance risk or credit risk adjustment for contracts is based on unobservable inputs. Where the use of such unobservable inputs are significant, these contracts are classified as Level 3.

Fair Value Considerations:

In determining the fair value of our financial instruments, the Company considers the source of observable market data inputs, liquidity of the instrument, the credit risk of the counterparty to the contract and risk of nonperformance of itself. The conditions and criteria used to assess these factors are:

Sources of market assumptions:

The Company derives most of its financial instrument market assumptions from market efficient data sources (e.g., Bloomberg and Platt’s). In some cases, where market data is not readily available, management uses comparable market sources and empirical evidence to derive market assumptions to determine a financial instrument’s fair value.

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Market liquidity:

Market liquidity is evaluated by the Company based on criteria as to whether the financial or physical instrument, or the underlying asset, is traded in an active or inactive market. An active market exists if the prices are fully transparent to market participants, can be measured by market bid and ask quotes, the market has a relatively large proportion of trading volume as compared to the Company’s current trading volume and the market has a significant number of market participants that will allow the market to rapidly absorb the quantity of the assets traded without significantly affecting the market price. Other factors the Company considers when determining whether a market is active or inactive include the presence of government or regulatory control over pricing that could make it difficult to establish a market based price upon entering into a transaction.

Nonperformance risk:

Nonperformance risk refers to the risk that the obligation will not be fulfilled and affects the value at which a liability is transferred or an asset is sold. Nonperformance risk includes, but may not be limited to, the Company or counterparty’s credit risk and settlement risk. Nonperformance risk adjustments are dependent on credit spreads, letters of credit, collateral, other arrangements available and the nature of master netting arrangements. The Company and its subsidiaries are parties to various interest rate swaps and options; foreign currency forwards, swaps, and options and derivatives and embedded derivatives which subject the Company to nonperformance risk. The financial and physical instruments held at the subsidiary level are generally non-recourse to the Parent Company.

Nonperformance risk on the investments held by the Company is incorporated in the investment’s exit price that is derived from quoted market data that is used to mark the investment to fair value.

The Company adjusts for nonperformance risk or credit risk on its derivative instruments by deducting a credit valuation adjustment (“CVA”). The CVA is based on the margin or debt spread of the Company or counterparty and the tenor of the respective derivative instrument. The counterparty for a derivative asset position is considered to be the bank or government sponsored banking entity or counterparty to the PPA or commodity contract. The CVA for asset positions is based on the counterparty’s credit ratings and debt spreads or, in the absence of readily obtainable credit information, the respective country debt spreads are used as a proxy. The CVA for liability positions is based on the Parent Company’s or the subsidiary’s current debt spread, the margin on indicative financing arrangements, or in the absence of readily obtainable credit information, the respective country debt spreads is used as a proxy. If the instrument is recourse to the Parent Company, the Parent Company’s current debt spread is used to adjust for nonperformance risk. All derivative instruments are analyzed individually and are subject to unique risk exposures.

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The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2009. Financial assets and liabilities have been classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the determination of the fair value of the assets and liabilities and their placement within the fair value hierarchy levels.

Total Quoted Market Prices in Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in millions) Assets Available-for-sale securities $ 1,676 $ 133 $ 1,501 $ 42 Trading securities 7 7 — — Derivatives 141 — 111 30 Total assets $ 1,824 $ 140 $ 1,612 $ 72 Liabilities Derivatives $ 350 $ — $ 320 $ 30 Total liabilities $ 350 $ — $ 320 $ 30

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2009:

Derivatives

Available-for- Sale Securities(5)

(in millions)

Balance at January 1, 2009(1) $ (69) $ 42 Total gains/losses (realized/unrealized)(1)

Included in earnings(2) (8) — Included in other comprehensive income 127 — Included in regulatory assets 2 — Purchases, sales, issuances and settlements(1) (40) — Assets transferred in (out) of Level 3 (241)(3) _—

Liabilities transferred (in) out of Level 3 229(4) _—

Balance at December 31, 2009(1) $ — $ 42

Total gains/losses for the period included in earnings attributable to the change in unrealized gains/losses relating to assets and liabilities held at both the beginning and end of the

period(1) $ 3 $ —

(1) _{Derivative assets and (liabilities) are presented on a net basis.}

(2) _{See Note 5—Derivative Instruments and Hedging Activities for further information regarding the classification of gains and losses included in}

earnings in the Consolidated Statements of Operations.

(3) _{Of the assets transferred out of Level 3 during the year ended December 31, 2009, $187 million represents a PPA that was dedesignated as a cash}

flow hedge because it qualified for the normal purchase normal sale scope exception as of December 31, 2008. As such, the agreement was measured at fair value using significant unobservable inputs at December 31, 2008, but is subsequently being

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amortized and is no longer adjusted for subsequent changes in fair value. The remainder of assets transferred out of Level 3 were primarily a result of a decrease in the significance of unobservable inputs used to calculate the credit valuation adjustments of these derivative instruments.

(4) _{Liabilities transferred out of Level 3 were primarily a result of a decrease in the significance of unobservable inputs to calculate the credit valuation}

adjustments of these derivative instruments.

(5) _{Available-for-sale securities in Level 3 are auction rate securities and variable rate demand notes which have failed remarketing, or are not actively}

trading, and for which there are no longer adequate observable inputs available to measure the fair value.

Nonfinancial Assets and Liabilities on a Nonrecurring Basis

For the purpose of impairment evaluation, the Company measured goodwill and intangibles assets, long-lived assets, and discontinued operations and assets held for sale at fair value under the new fair value measurement accounting guidance. As the majority of significant assumptions used for these valuations were not observable, management believes that all of these valuation are level 3 measurements in the fair value hierarchy.

As noted in Note 19—Asset Impairment Expense, long-lived assets held and used with a carrying amount of $26 million were written down to their fair value of $2 million, resulting in an asset impairment charge of $24 million, which was included in net income for the year.

As noted in Note 8—Goodwill and Other Intangible Assets, goodwill with an aggregate carrying amount of $122 million was written down to its implied fair value of $0 million, resulting in goodwill impairment of $122 million, which was included in net income for the year.

As noted in Note 21—Discontinued Operations and Held for Sale Businesses, long-lived assets held for sale with a carrying amount of $275 million were written down to their fair value of $130 million, less cost to sell of $5 million (or $125 million), resulting in a loss of $150 million, which was included in net income for the year.