UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 20-F

       [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                                       OR

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

                   For the fiscal year ended December 31, 2002

                                       OR

     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
      For the transition period from _________________ to ________________

                        Commission file number 333-13094

                             AES Drax Energy Limited
             (Exact name of Registrant as specified in its charter)

                                 Cayman Islands
                 (Jurisdiction of incorporation or organization)

                 18 Parkshot, Richmond, Surrey, TW9 2RG, England
                    (Address of principal executive offices)

                   Securities registered or to be registered
                   pursuant to Section 12(b) of the Act: None

                   Securities registered or to be registered
                   pursuant to Section 12(g) of the Act: None

              Securities for which there is a reporting obligation
                     pursuant to Section 15(d) of the Act:

                               Title of each class
           U.K.(pound)135,000,000 11.25% Senior Secured Notes due 2010
              U.S.$200,000,000 11.50% Senior Secured Notes due 2010

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.

                           172,000,000 ordinary shares

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 [ ]

Indicate by check mark which financial statement item the registrant has elected
to follow.
                                                         Item 17 [X] Item 18 [ ]

<PAGE>


                               Table of Contents

                                                                            Page

Presentation of Currency and Financial Information.............................1

Forward-Looking Statements.....................................................1

Market Data and Industry Terms.................................................2

PART I.........................................................................3

Item 1.  Identity of Directors, Senior Management and Advisers.................3

Item 2.  Offer Statistics and Expected Timetable...............................3

Item 3.  Key Information.......................................................3

     Selected Financial Data...................................................3
     Historical Performance Summary - Selected Operating Data..................6
     Capitalization and Indebtedness...........................................6
     Reasons for the Offer and Use of Proceeds.................................6
     Exchange rates............................................................7
     Risk Factors..............................................................8

Item 4.  Information on the Company...........................................18

     History and Development of the Company...................................18
     Significant Project Parties..............................................19
     Financing................................................................20
     Organizational Structure.................................................22
     The Company, its Guarantors and AES......................................23
     Business Overview........................................................24
     Property, Plant and Equipment............................................24
     Environmental Matters and Regulation.....................................30
     Significant Developments During 2002 and Recent Developments.............41

Item 5.  Operating and Financial Review and Prospects.........................46

     Results of Operations....................................................48
     Liquidity and Capital Resources..........................................56
     Trend Information........................................................65

Item 6.  Directors, Senior Management and Employees...........................65

     Senior Management........................................................65
     Directors................................................................66
     Compensation of Management...............................................66
     Employees................................................................67
     Board Practices, Share Ownership.........................................67

Item 7.  Major Shareholders and Related Party Transactions....................67

Item 8. Financial Information.................................................67

     Consolidated Statements and Other Financial Information..................67
     Legal Proceedings........................................................67
     Significant Changes......................................................68

Item 9. The Offer and Listing.................................................68

Item 10. Additional Information...............................................68

     Memorandum and Articles of Association...................................68
     Exchange Controls........................................................69
     Material Contracts.......................................................70
     Documents on Display.....................................................70

Item 11. Quantitative and Qualitative Disclosure About Market Risk............70

Item 12. Description of Securities Other Than Equity Securities...............72

PART II.......................................................................72

Item 13. Defaults, Dividends, Arrearages and Delinquencies....................72

Item 14. Material Modifications to the Rights of Security Holders and Use of
         Proceeds.............................................................72

Item 15. Controls and Procedures..............................................72

Item 16. Reserved.............................................................72

PART III......................................................................77

Item 17.  Financial Statements................................................77


<PAGE>


               PRESENTATION OF CURRENCY AND FINANCIAL INFORMATION

     Amounts set forth in the financial statements included in Appendix A to
this annual report are stated in pounds sterling. In this annual report,
references to "(pound)", "pounds sterling" or "Pounds" are to the currency of
the United Kingdom, which we sometimes refer to as the UK. References to "US
dollars", "US$" or "$" are to the currency of the United States. In this annual
report, "US GAAP" means US generally accepted accounting principles and "UK
GAAP" means UK generally accepted accounting principles.

     The financial statements for the AES Drax companies are prepared in
accordance with UK GAAP, which differs in certain significant respects from US
GAAP. For a discussion of these differences and a reconciliation between UK and
US GAAP, see note 29 to our financial statements included in this annual report.


                           FORWARD-LOOKING STATEMENTS

     Certain statements included in this report are forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements speak only as of the date hereof.
Forward-looking statements can be identified by the use of forward-looking
terminology such as "believe", "expects", "may", "intends", "will", "should" or
"anticipates" or the negative forms of other variations of these terms of
comparable terminology, or by discussions of strategy. Future results covered by
the forward-looking statements may not be achieved. Forward-looking statements
are subject to risks uncertainties and other factors, which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements.

     Under the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, we have identified some of these risks, uncertainties and
other important factors in "Key Information--Risk Factors" and "Operating and
Financial Review and Prospects."

     You should also consider, among others, the following important factors:

     o   general economic and business conditions in the UK;

     o   changes in governmental regulations affecting the Drax Power Station
         and the UK electric power industry generally, including changes in the
         New Electricity Trading Arrangements ("NETA"). NETA was implemented on
         March 27, 2001;

     o   general industry trends;

     o   changes to the competitive environment;

     o   power prices and resource availability and pricing;

     o    changes in business strategy, development plans or vendor
          relationships in the market for power in the UK;

     o   that the principal hedging arrangement relating to power sales from the
         Drax Power Station has been terminated, and the Drax Power Station is
         currently operating as a fully-merchant plant;

     o   AES Drax Holdings Limited is operating under a standstill agreement
         dated December 13, 2002 (the "Standstill Agreement") between, inter
         alios, certain of its senior creditors which is currently scheduled to
         terminate on May 31, 2003 (the "Standstill Termination Date") pending
         discussions on a restructuring of its indebtedness. The outcome of
         those discussions cannot be predicted at this time but the proposed
         restructuring currently does not provide for any recovery by holders of
         the notes. The arrangements put in place under the Standstill Agreement
         are referred to as the Standstill Arrangements. Neither we nor any of
         our noteholders are party to the Standstill Agreement and are not
         therefore covered by the Standstill Arrangements;

     o   our indebtedness is contractually and structurally subordinated to the
         indebtedness of our subsidiaries on whom we rely for distributions to
         service such indebtedness;

     o   availability, terms and deployment of capital;

     o   interest rate volatility;


<PAGE>


     o   changes in currency exchange rates, inflation rates and conditions in
         financial markets; and

     o   availability of qualified personnel.

     These forward-looking statements speak only as of the date of this report.
We do not intend to publicly update or revise these forward-looking statements
to reflect events or circumstances after the date of this report, and we do not
assume any responsibility to do so.


                         MARKET DATA AND INDUSTRY TERMS

     In this report, we rely on, and refer to, information and statistics
regarding economic conditions and trends, the market for electric power and our
market share in the sectors of that market in which we compete. We obtained this
information and statistics from various third-party sources and/or our own
internal estimates. We believe that these sources and estimates are reliable,
but we have not independently verified them and cannot guarantee their accuracy
or completeness.

     The Drax Power Station's business is the generation and sale of
electricity. Until November 2002, when the hedging contract between AES Drax
Power Limited and TXU Europe Energy Trading Limited ("TXU Europe") (the "Hedging
Contract") was terminated, generated electricity was sold under a two-part
pricing method, representing the two main products, capacity and energy. Under
the current market structure, all generated electricity is sold as electrical
energy, produced by the Drax Power Station's electricity generating facilities.
Energy refers to the sale of actual electricity produced by a power station and
capacity refers to the generating capability of a particular plant. Electrical
energy is expressed as kilowatt hours ("KWh"), megawatt hours ("MWh"), gigawatts
hours ("GWh") or terawatts hours ("TWh") of electricity produced or consumed
over a period of time. One KW = 1,000 watts, one MW = 1,000KW, one GW = 1,000MW
and one TW = 1,000GW. The sale of electrical capacity is expressed as kilowatts
("KW"), megawatts ("MW"), gigawatts ("GW") or terawatts ("TW") of electricity
available for use at any point in time.

                                       2

<PAGE>


                                     PART I

General

     AES Drax Energy Limited is a holding company with no material operations.
We were formed on February 28, 2000 in connection with the refinancing of bridge
loans made to help finance the costs of the acquisition (the "Acquisition") of
the Drax Power Station from National Power plc (now called Innogy plc) in order
to issue the 11.25% Senior Secured Notes due 2010 and the 11.5% Senior Secured
Notes due 2010, which we refer to as the notes. Our only asset is the indirect
ownership of all of the outstanding capital stock of AES Drax Power Limited, the
owner of the Drax Power Station. We are entirely dependent on the receipt of
distributions from our direct and indirect subsidiaries to meet our obligations
under the notes. AES Drax Energy is a wholly owned indirect subsidiary of The
AES Corporation. The AES Corporation files quarterly and annual reports with the
Securities and Exchange Commission under the Securities and Exchange Act of
1934, which are publicly available. We sometimes refer to the group of companies
which own the Drax Power Station, being AES Drax Acquisitions Limited and its
subsidiaries, as AES Drax.

Item 1.  Identity of Directors, Senior Management and Advisers - Not applicable.

Item 2.  Offer Statistics and Expected Timetable - Not applicable.

Item 3.  Key Information

Selected Financial Data

     Set forth below is our selected consolidated profit and loss statement for
the three years ended December 31, 2002 and the consolidated balance sheet as of
December 31, 2002, 2001 and 2000. Financial information for earlier periods is
not available as we were organized on February 28, 2000. This selected profit
and loss data and consolidated balance sheet data have been derived from our
audited consolidated financial statements, prepared in accordance with UK GAAP.
This selected financial data should be read in conjunction with our consolidated
financial statements, related notes and other financial information included in
this annual report.

     The financial statements are prepared in accordance with UK GAAP, which
differ in certain significant respects from US GAAP. AES Drax's results which
are consolidated within the results of our parent company, The AES Corporation,
are prepared under US GAAP.

Selected Consolidated Profit and Loss Data in accordance with UK GAAP:

<TABLE>

                                                                   Year ended            Year ended           Year ended
                                                                  December 31,          December 31,         December 31,
                                                                      2002                  2001                 2000
                                                                  ------------          ------------         ------------
                                                                                      (in (pound)000's)
<S>                                                                   <C>                    <C>                   <C>

Revenues................................................             524,831              586,103               622,776
Gross Profit............................................             305,369              318,899               344,558
Administrative expenses ................................            (894,768)(1)         (176,162)             (171,017)
Operating (loss) / profit...............................            (589,399)             142,737               173,541
Interest receivable and similar income..................              23,824               16,204                12,890
Interest payable and similar charges....................            (206,387)            (197,611)             (177,787)
(Loss) / Profit on ordinary activities before taxation..            (771,962)             (38,670)                8,644
Loss on ordinary activities after taxation..............            (771,452)             (49,556)              (13,791)

----------------
(1)  The increase in the Administrative expenses in 2002 is due to two
     exceptional items that we incurred: an impairment in Fixed Assets of
     (pound)579 million and the write-off of (pound)136.8 million of costs
     associated with the termination of the Hedging Contract (see "Operating and
     Financial Review and Prospects--Results of Operations").
</TABLE>

                                       3

<PAGE>


Selected Consolidated Balance Sheet Data in accordance with UK GAAP:

<TABLE>

                                                                As of                As of                As of
                                                            December 31,         December 31,         December 31,
                                                                2002                 2001                 2000
                                                            ------------         ------------         ------------
                                                                                (in (pound)000's)
<S>                                                         <C>                  <C>                  <C>
Current Assets......................................           996,743            1,091,466            1,190,741
Total Assets........................................         2,079,861            2,826,321            2,986,059
Current Liabilities.................................          (138,997)            (102,714)            (168,443)
Long Term Liabilities...............................        (2,404,520)          (2,604,811)          (2,611,264)
Shareholders' Equity................................          (463,656)             118,796              206,352

</TABLE>

<TABLE>
                                                             Year ended 31        Year ended 31         Year ended
                                                               December             December            31 December
                                                                 2002                 2001                 2000
                                                             -------------        -------------         ----------
                                                                                 (in (pound)000's)
<S>                                                              <C>                  <C>                    <C>
Summary of US GAAP adjustments
Net (loss) / income under UK GAAP....................            (771,452)             (49,556)             (13,791)
US GAAP adjustments:
   Goodwill..........................................              33,876               33,876               33,876
   Additional depreciation...........................             (19,350)             (19,350)             (19,350)
   Interest..........................................              48,370               43,874               44,920
   Deferred Tax......................................              22,952               14,978               12,303
   Additional depreciation due to deferred tax.......             (20,326)             (20,326)             (20,326)
 Severance pay expensed in the UK....................                   -                    -               12,053
Unfavorable IT contract..............................                   -                    -                1,995

Impairement of fixed assets..........................             579,000                    -                    -
                                                               ==========           ==========           ==========
Net (loss)/income under US GAAP......................            (127,284)             (12,489)              55,675
                                                               ==========           ==========           ==========
Shareholders' equity under UK GAAP...................            (463,656)             118,796              206,352
US GAAP adjustments:
   Cumulative effect of previous adjustments.........              72,332               72,454                2,988
   Goodwill..........................................              33,876               33,876               33,876
   Additional depreciation...........................             (19,350)             (19,350)             (19,350)
   Interest..........................................              48,371               43,874               44,920
   Deferred tax......................................              22,952               14,978               12,303
   Additional depreciation due to deferred tax.......             (20,326)             (20,326)             (20,326)
   Severance pay expensed in the UK..................                   -                    -               12,053
   Unfavorable IT contract...........................                   -                    -                1,995
Derivatives..........................................              (1,324)             (53,174)               3,995
Impairment of fixed assets...........................             579,000                    -                    -
                                                               ----------           ----------           ----------
Shareholders' equity under US GAAP ..................             251,875              191,128              278,806
                                                               ==========           ==========           ==========
Summary Consolidated Balance Sheet Data in
   accordance with US GAAP:
   Total Assets......................................           4,311,578            3,920,364            3,250,428
   Current Liabilities...............................            (187,867)            (161,714)            (200,443)
   Long-term Liabilities.............................          (2,184,079)          (2,373,326)          (2,434,968)

Ratio of Earnings to Fixed Charges calculated in
   accordance with:
   UK GAAP...........................................               (2.64)                0.81                 1.05

</TABLE>


                                       4

<PAGE>


<TABLE>
                                                             Year ended 31        Year ended 31         Year ended
                                                               December             December            31 December
                                                                 2002                 2001                 2000
                                                             -------------        -------------         -----------
                                                                                 (in (pound)000's)
<S>                                                              <C>                  <C>                    <C>
   US GAAP...........................................                0.08                 0.90                 1.48

</TABLE>

                                       5

<PAGE>


Historical Performance Summary - Selected Operating Data

     The Drax Power Station currently achieves a net thermal efficiency of
approximately 38%. This compares favorably with the 35% to 39% normally expected
for large coal-fired power stations similar to the Drax Power Station. As the
Drax Power Station is fitted with Flue Gas Desulphurization ("FGD") and
currently achieves comparable efficiencies to other stations that do not have
FGD, it is in a strong competitive position as it can produce electricity as
inexpensively as competing coal-fired power stations while remaining within
currently permitted sulphur dioxide (SO2) emissions limits.

     Data made available by Innogy plc (formerly National Power plc, the former
owner of the Drax Power Station) confirms that the Drax Power Station had an
overall availability of approximately 87% to 88% over the 1996-1999 period. The
Drax Power Station's operating history for the years ended March 31, 1998, 1999
and 2000, the 12 months ended December 31, 2000, 2001 and 2002, and the three
months ended March 31, 2003 is summarized below:


<TABLE>
                                                                                                                3 Months
                                         Year ended March 31,                  Year ended December 31,            ended
                                    ---------------------------------     ----------------------------------    March 31,
                                     1998         1999         2000        2000(2)       2001         2002         2003
                                   --------     --------     --------     --------     --------     --------     --------
<S>                                 <C>          <C>          <C>          <C>          <C>          <C>           <C>
Net Generation............          23,321       22,507       21,595       23,048       22,298       19,454        7,229
(GWh/Yr)
Equivalent Availability
   Factor.................           87.37        91.10        81.60        82.50        85.80        81.90        91.10
(% of time the station
   was available for
   generation)
Net Capacity Factor.......           71.00        71.40        65.15        66.48        64.40        56.30        85.00
(% of actual net
   generation to
   potential max. net
   generation)
Forced Outage Rate........            4.60         5.90         7.72(1)     10.26(1)      8.03        12.49         2.20
(% of time that a failure
   or unplanned condition
   required the unit to
   be removed from
   service)
Net Thermal Efficiency....           37.74        38.87        38.86        38.17        37.30        37.02        38.29
(% of energy input
   converted to
   electricity)
</TABLE>

(1)  The operating performance of the Drax Power Station for the year ended
     March 31, 2000 was adversely affected by the fire which shut down Unit 3
     from December 27, 1999 until the end of the period; and for the year ended
     December 31, 2000 by the rotor incident on Unit 2 in September 2000.

(2)  Our financial year-end is December 31, so all of these performance measures
     are now recorded in line with our financial year.


Capitalization and Indebtedness - Not applicable.

Reasons for the Offer and Use of Proceeds - Not applicable.


          Significant Developments During 2002 and Recent Developments

     For a discussion of these developments please see "Information on the
Company--Significant Developments During 2002 and Recent Developments."


                                       6
<PAGE>


Exchange rates

     The following tables set forth, for the dates or periods indicated, the
Interbank market rate and generally reflect the exchange rates for transactions
of US $1 million or more. These are the "official" rates quoted in the media,
such as The Wall Street Journal. These rates have been sourced from "OANDA, The
Currency Site" (www.oanda.com):

<TABLE>

                                    April         March        February       January       December      November
      US dollars per(pound)1        2003          2003           2003          2003           2002          2002
      ----------------------        ----          ----           ----          ----           ----          ----
<S>                                  <C>           <C>           <C>           <C>            <C>           <C>
Noon buying rate
High.......................         1.5989        1.6162         1.6580        1.6562         1.6070        1.5974
Low........................         1.5457        1.5534         1.5698        1.5904         1.5447        1.5409

</TABLE>


<TABLE>

                                                                       Year ended                       3 months
                US dollars per(pound)1                                 December 31,                   ended March 31,
                ----------------------             -----------------------------------------------  ------------------
                                                      2002             2001             2000               2003
                                                   -----------     -----------      -----------        -----------
<S>                                                   <C>              <C>              <C>                 <C>

Noon buying rate
Period end rate...............................       1.6044           1.4515           1.4955             1.5749
Average rate for the period...................       1.5038           1.4413           1.5204             1.6038

</TABLE>


                                       7

<PAGE>


                                  Risk Factors

     The only securities we have outstanding which are held by the public are
our (pound)135,000,000 11.25% Senior Secured Notes due 2010 and $200,000,000
Senior Secured Notes due 2010, which we refer to as the notes. In addition, one
of our indirect subsidiaries, AES Drax Holdings Limited ("AES Drax Holdings"),
has issued 9.07% Senior Secured Bonds due 2025 and 10.41% Senior Secured Bonds
due 2025, which we refer to as the bonds. AES Drax Holdings has also issued
(pound)1,725,000,000 8.86% Guaranteed Secured Bonds due 2015, which bonds and
related coupons we refer to collectively as the Eurobonds. We refer to the bonds
and the Eurobonds together as the senior debt and the holders of the senior debt
together with the banks which funded the acquisition of the Eurobonds are
referred to as the senior creditors. The risk factors we have set forth below,
therefore, relate to the risks associated with owning our publicly traded debt
securities and the operating risks associated with the Drax Power Station that
may affect our ability to repay the notes.

     We are currently in default on the notes, and AES Drax Holdings is
currently in default under the bonds and Eurobonds. We received an acceleration
notice on May 16, 2003 from the Trustee for the notes declaring the notes to be
immediately due and payable. You should read "Information on the
Company--Significant Developments During 2002 and Recent Developments" where we
describe the defaults and the Standstill Arrangements and the current position
in relation to the senior debt restructuring relating to AES Drax Holdings and
the senior creditors. As part of the Standstill Arrangements, some of the
defaults in respect of the senior debt have been permanently waived, some of
the defaults in respect of the senior debt have been temporarily waived and
some senior creditors have agreed to forebear the acceleration of senior debt
and enforcement of their security which could arise as a result of a default on
the Subsidiary Obligations (as defined below) until the Standstill Termination
Date. However, neither we nor our noteholders are party to the Standstill
Agreement and are therefore not covered by the Standstill Arrangements.

     This report also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
the risks faced by us described below and elsewhere in this annual report. You
should read "Forward-Looking Statements" for more information regarding these
forward-looking statements.

Risks relating to holding our debt securities

   We were unable to make full payment of interest due on the notes on February
   28, 2003. We are therefore in default under the terms of the notes. If the
   security trustee for the noteholders serves a notice in writing to the
   security trustee for the bondholders and the holder of the Eurobonds,
   enforcement action may be commenced against us after 90 days pursuant to the
   terms of the intercreditor arrangements, although such enforcement rights may
   result in little or no recovery for noteholders.

     The ability of the trustee for the noteholders to enforce the mortgage over
our shares and to transfer our shares which comprise in part the collateral
securing the notes is subject to certain standstill periods under the terms of
the Energy Intercreditor Deed among AES Drax Energy Limited, AES Drax Energy II
Limited, AES Drax Power Finance Holdings Limited, AES Drax Power Finance
Limited, AES Drax Acquisition Holdings Limited, AES Drax Acquisition Limited,
agents for the holders of the Subsidiary Obligations (as defined below) and The
Bank of New York, as trustee under the indentures for the bonds and the notes.
The rights of enforcement of a noteholder are significantly limited by the terms
of the Energy Intercreditor Deed. For a description of the Energy Intercreditor
Deed, we refer you to the "Subordination of the Notes and the Energy
Intercreditor Deed" section of the F-4 Registration Statement (as defined in
"Additional Information -- Documents on Display"), which description is hereby
incorporated by reference herein.

     Under the Energy Intercreditor Deed, the trustee may only transfer our
shares to a group of entities which must satisfy certain criteria relating to
operating experience, minimum net worth, minimum credit rating and regulatory
approval or otherwise be approved by a majority of the Senior Lenders (as
defined under "Information on the Company -- Financing"). In addition, a
transfer of our shares by the security trustee for the noteholders may require
the consent of third parties (including regulatory agencies) upon or following
a foreclosure. We cannot assure you that the trustee or any third party will
cooperate or give their consent when asked to facilitate a transfer of assets
or operating rights to the trustee or any other person upon or following a
foreclosure.

                                       8

<PAGE>


     The trustee for the notes has provided notice of its resignation pursuant
to the terms of the notes indenture. We are therefore required to appoint a
successor trustee; however, given our inability to service our debt obligations,
we cannot assure you that any successor trustee will accept such appointment.

     The assets of our subsidiaries, including the shares in certain of our
subsidiaries and the Drax Power Station which generates all the cash flows for
the AES Drax group, have been pledged as collateral for the Subsidiary
Obligations (as defined below). The Eurobonds and the rights associated
therewith have also been pledged to the Senior Lenders under the Bank Facility.
In the event of a foreclosure by the Senior Lenders following a default under
the Bank Facility, the Senior Lenders will have the right, together with the
trustee for the bonds and the counterparties to certain swaps, to direct the
enforcement of the security provided in connection with the Eurobonds and the
bonds, with the result that these assets may be sold to any third party to
satisfy the repayment obligations under the Eurobonds and indirectly the Senior
Lenders' claims under the Bank Facility as well as the bonds. In such
circumstances our shares pledged as collateral securing the notes may have no
value to any potential purchaser, and proceeds obtained by the holders of the
Subsidiary Obligations, together with the trustee for the bonds, in connection
with the sale of the assets of our subsidiaries may be insufficient to satisfy
their claims and to pay principal, premium, if any, and interest on the notes.
See "Information on the Company--Organizational Structure--Structure of the
Acquisition and Refinancing." As a result of the foregoing and the current
inability of AES Drax Holdings to service the Subsidiary Obligations, the
enforcement rights under the Energy Intercreditor Deed may result in little or
no recovery for noteholders.

     As part of the Standstill Agreement, debt service cover ratios were not
calculated as of December 31, 2002 and AES Drax Holdings was not permitted to
make any distributions to us. Since we had insufficient funds of our own, we
were unable to make the full amount of the interest payment of $11.5 million
and (pound)7.6 million due on the notes on February 28, 2003. Our failure to
make the full amount of the required interest payment constitutes an event of
default under the notes. On May 16, 2003 the trustee for the notes delivered to
us a notice of acceleration declaring the notes to be immediately due and
payable. If the security trustee for the noteholders serves a notice in writing
to the security trustee for the bondholders and the holder of the Eurobonds,
enforcement action, subject to certain conditions, may be commenced against AES
Drax Energy after 90 days pursuant to the terms of the intercreditor
arrangements although such enforcement rights may be worthless as described
above.

   The notes are contractually and structurally subordinated to the indebtedness
   of our subsidiaries.

     We are a holding company with no material operations. Our subsidiaries
conduct all of the group's operations and own all of the assets which generate
the cash flow upon which we have been dependent to meet our obligations with
respect to the notes. As a result, the notes are structurally subordinated to
all indebtedness of our subsidiaries. We refer to AES Drax Holdings' direct
obligations under the Eurobonds, the fixed coupons on the Eurobonds and the
related swaps and the bonds, together with the related security arrangements, as
the Subsidiary Obligations. The ability of our subsidiaries to make required
payments under the Subsidiary Obligations and our subsidiaries' ability to pay
dividends and other payments under the terms of the Subsidiary Obligations are
dependent upon the operating performance of the Drax Power Station. The
Subsidiary Obligations entered into in connection with the Acquisition and the
issuance of the bonds restrict our subsidiaries' ability to pay dividends, make
distributions or otherwise transfer funds to us. The Subsidiary Obligations
require that, before paying dividends or making distributions or other transfers
directly or indirectly to us, our subsidiaries must first pay other obligations,
such as operating expenses, taxes and debt service, including debt service
(after giving effect to any net payment under the AES Drax Swap (as defined
under "Information on the Company--Financing")) under the Eurobonds and the
bonds and fund reserve accounts relating to such debt. As a result of the
developments described under "Information on the Company--Significant
Developments During 2002 and Recent Developments" AES Drax Holdings was
prohibited from making any distributions to us at December 31, 2002 and we were
unable to make the required interest payments due on the notes in February 2003
and we are currently in default under the notes. Due to the contractual and
structural subordination of the notes and insufficient cash flows from
operations we do not expect to be able to satisfy any of our debt service
obligations on the notes in the future.

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<PAGE>


   Cash flows from the operation of the Drax Power Station are not currently
   sufficient to satisfy the interest and principal payments on our Subsidiary
   Obligations. AES Drax Holdings and its subsidiaries are operating under a
   Standstill Agreement with certain of the senior creditors pending discussions
   on a restructuring of the Subsidiary Obligations and the outcome of those
   discussions cannot be predicted at this time. The Standstill Agreement is
   currently scheduled to terminate on May 31, 2003. The Standstill Arrangements
   do not contemplate a restructuring of Drax Energy's debt and the
   restructuring proposals do not provide for any recovery by noteholders.

     Cash flows from the Drax Power Station are not currently sufficient to
satisfy the interest and principal payments on the Subsidiary Obligations and,
absent a restructuring of such indebtedness, the senior creditors will be able
to enforce security arrangements under intercreditor arrangements if certain
conditions are satisfied. If the senior creditors enforce their security, we may
lose control of the Drax Power Station and therefore will be unable to make any
further payment on the notes.

     AES Drax has proposed a business plan and restructuring proposal relating
to the Subsidiary Obligations certain sections of which were filed with the SEC
by AES Drax Holdings on a Form 6-K on April 11, 2003. AES Drax's ability to
implement the business plan and to satisfy the Subsidiary Obligations depends
upon the successful implementation of a restructuring proposal. The key aims of
the restructuring proposal are:

     o    to de-leverage the capital structure of the AES Drax companies;

     o    to reduce debt with the proceeds of AES Drax's claim against TXU
          Europe resulting from termination of the Hedging Contract;

     o    to preserve liquidity to mitigate the impact of potential prolonged
          low market prices or unexpected volatility; and

     o    to benefit from the contributions of The AES Corporation to maximize
          value to AES Drax Holdings' creditors.

     The restructuring proposal is, we understand, subject to ongoing discussion
with the steering committee representing the syndicate of banks that financed
the Eurobonds and the members of the ad hoc committee formed by holders of the
bonds (the "Committees"). We are not a party to, or able to predict the outcome
of, these discussions. However, if the senior creditors withdraw their support
for the restructuring process, it is likely that they will seek to enforce their
rights under the terms of the Eurobonds, bank facility and bonds, as applicable.
In addition, the Standstill Agreement currently terminates on May 31, 2003. It
is unlikely that a restructuring will have been completed by May 31, 2003 and no
assurance can be given that the Standstill Arrangements will be extended beyond
such date. Moreover, the Standstill Arrangements do not contemplate a
restructuring of the notes.

     The restructuring proposal, as currently contemplated, does not provide for
any recovery by holders of the notes.

   We and our subsidiaries are substantially leveraged and have not been able to
   service our debt. Our subsidiary, AES Drax Holdings, is currently in default
   on its bonds and Eurobonds. Although AES Drax Holdings is currently in
   discussions with its senior creditors about a restructuring of the Subsidiary
   Obligations,we are not a party to such discussions and there are no
   assurances such restructuring will permit us to make any payments due on the
   notes.

     As a result of the Acquisition by AES Drax Limited ("AESD"), an exempted
company incorporated with limited liability under the laws of the Cayman
Islands, of all the outstanding capital stock of AES Drax Power Limited, a
private limited company organized under the laws of England and Wales and
owner/operator of the Drax Power Station, the AES Drax group is highly
leveraged. The AES Drax group's leverage and obligations have had and could have
important consequences for the holders of the notes, including the following:

     o    a significant portion of the Drax Power Station's cash flow from
          operations is dedicated to the payment of the AES Drax group's debt
          service obligations;

     o    the AES Drax group's leverage has made it more sensitive to a downturn
          in general economic conditions and changes in market conditions which
          impact on electricity prices;

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<PAGE>


     o    the AES Drax group's substantial indebtedness may limit the operating
          company's capacity to respond to market conditions (including its
          ability to make capital expenditures, or satisfy working capital, or
          other general corporate requirements) or to meet its contractual or
          financial obligations under which it is currently in default; and

     o    the AES Drax group may be more highly leveraged than other companies
          with which it competes, which may place it at a competitive
          disadvantage. In addition, if and to the extent AES Drax requires
          additional financing in the future for working capital, capital
          expenditures or other general corporate purposes, the group's leverage
          may impair its ability to obtain such additional financing.

     Cash flow from the Drax Power Station's operations have not been
     sufficient to meet our obligations under the notes.

     AES Drax was unable to pay the interest due on the notes as at the end of
February 2003. Because the conditions necessary to permit distributions by our
subsidiaries could not be, and were not, satisfied on the relevant distribution
dates, AES Drax Holdings was not able to make any distributions to permit the
payment of interest.

     The debt service reserve accounts were substantially depleted at the time
of the February 2003 interest payment and any future interest payments will
require an outcome from the restructuring plan that will allow AES Drax Holdings
to make the required distributions to us. No assurances can be given that any
restructuring plan will provide for any recovery on the notes.

   The Hedging Contract was terminated on November 18, 2002. No alternative
   long-term electricity hedging arrangements have been entered into. As a
   result, the Drax Power Station is currently operating as a purely merchant
   power plant, fully exposed to market-related risks.

     On November 14, 2002, TXU Europe was required to make a (pound)49 million
payment to AES Drax for power purchased in October under the Hedging Contract.
TXU Europe failed to make the payment, and attempts to negotiate a solution
acceptable to both parties were unsuccessful. On November 18, 2002, AES Drax
terminated the Hedging Contract, with immediate effect, on the grounds of TXU
Europe's failure to provide the credit support of approximately (pound)270
million required under the terms of the Hedging Contract.

     As a result of the termination of the Hedging Contract, the Drax Power
Station now operates as a purely merchant facility dependent on revenues derived
from sales of electricity under NETA. AES Drax is therefore exposed to
market-related risks, including general economic conditions, electricity demand,
weather and other circumstances beyond its control. The Hedging Contract
accounted for approximately 60% of the revenues generated by AES Drax and
payments under this agreement were significantly higher than AES Drax is
currently receiving in the open market.

     See "Information on the Company--Significant Developments During 2002 and
Recent Developments."

   Our subsidiary, AES Drax Holdings, entered into a Standstill Agreement with
   certain of its senior creditors, temporarily or permanently waiving certain
   defaults under the terms of the Subsidiary Obligations through the Standstill
   Termination Date. If a restructuring plan satisfactory to the senior
   creditors cannot be agreed, AES Drax may lose control of the Drax Power
   Station.

     On November 19, 2002, the TXU group, including TXU Europe (the counterparty
to the Hedging Contract) and the guarantor of the Hedging Contract, TXU Europe
Group plc ("TXU Europe Group"), was placed into administration. After
termination of the Hedging Contract and the placing of the TXU group into
administration, AES Drax secured the support of the bank lenders which
indirectly financed the Acquisition (the "Senior Lenders") to address the
liquidity needs of the project, including the provision of letters of credit
required to support merchant trading of the Drax Power Station's output in the
open market. AES Drax has submitted a claim for capacity damages of
approximately (pound)266 million in accordance with the terms of the Hedging
Contract as well as a claim of approximately (pound)85 million for unpaid
electricity delivered in October and the first half of November. Any recoveries
on these claims are pledged to secure AES Drax Holdings' obligations under the
Subsidiary Obligations. The Hedging Contract accounted for approximately 60% of
the revenues generated by AES Drax and payments under this agreement were
significantly higher than AES Drax is currently receiving in the open market.

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     On December 13, 2002, AES Drax Holdings signed the Standstill Agreement
with certain of its senior creditors to provide time to put in place a debt
restructuring relating to the Subsidiary Obligations. The Standstill Agreement
provides temporary and/or permanent waivers by those senior creditors of
defaults that have occurred or could occur up to the Standstill Termination Date
in relation to the Senior Debt. The failure to implement a restructuring or
agree an extension to the Standstill Termination Date could result in the
Eurobonds and bonds being declared due and payable which would result in certain
other financial obligations also becoming due and payable. The acceleration of
AES Drax Holdings' outstanding indebtedness could result in the senior creditors
enforcing their security, whereby we may lose control of the Drax Power Station
and be unable to make any further payments on the notes.

UK TAX RISKS RELATING TO THE STRUCTURE OF THE ACQUISITION

   AES Drax's cash flows could be materially adversely affected if the tax
   treatment of the Acquisition structure is different than we expect.

     The financing of the Acquisition was structured to enhance the cash flows
available to service the Subsidiary Obligations, and to make distributions
sufficient to pay principal and interest on the notes. The structure is premised
on the following key UK tax assumptions, which we refer to as the key tax
assumptions:

     o    interest payable with respect to the Eurobonds and the bonds will be
          deductible for UK tax purposes and the interest amounts can be
          surrendered by way of group relief;

     o    payments on the notes, the bonds and the Eurobonds will not be subject
          to UK withholding tax as a result of the notes, the bonds and the
          Eurobonds being eurobonds listed on a recognized stock exchange
          (within the meaning of Section 841 of the Income and Corporation Taxes
          Act of 1988), or otherwise;

     o    there will be no UK tax levied on AES Drax Acquisition Limited in
          respect of the shares which it purchased from InPower Limited under
          certain forward purchase arrangements;

     o    there will be no apportionment under the controlled foreign company
          rules of any chargeable profits and creditable tax to us or AES Drax
          Acquisition Limited in any accounting period of either company under
          UK tax law; and

     o    the Eurobonds will not be repaid early.

     The above is not a full list of the UK tax assumptions on which the
Acquisition structure is premised. If any of the above or other tax assumptions
prove to be incorrect, it could materially adversely affect our current levels
of cash flows.

     On April 24, 2002 the UK Inland Revenue issued guidance on the application
of certain legislation relating to interest deductions. The guidance does not
have the force of law but, if it proves to be a correct interpretation of UK
law, the Inland Revenue could seek to challenge the interest deduction on the
Eurobonds. If such a challenge were to be successful, it could result in a part
of the interest on the Eurobonds not being deductible which would impact our tax
charges.

RISKS RELATING TO OPERATION OF THE DRAX POWER STATION

Dependence Upon Operations of the Drax Power Station

   Our ability to make payments under the notes has been dependent entirely on
   the successful operation by AES Drax of the Drax Power Station. Although the
   Drax Power Station has generally operated as expected, market and other
   factors have resulted in insufficient cash flows to meet the Subsidiary
   Obligations as well as our obligations under the notes.

     Our ability to make any payments of principal, premium, if any, interest
and other amounts on the notes has been dependent entirely on the successful
operation of the Drax Power Station, as this is the only operating asset in our
group.

     The initial assumptions on which the AES Drax companies relied when making
the original investment assumed that it would have the protection of its
long-term Hedging Contract with TXU Europe and that electricity prices would

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<PAGE>


remain at a certain level. Since the acquisition of the Drax Power Station and
the issue of the notes electricity prices have declined on average by
approximately 40% and in November 2002 our Hedging Contract with TXU Europe was
terminated and the TXU group entered into administration. These events have
materially adversely affected the operating performance of the Drax Power
Station and is largely responsible for the inability to generate cash flows
sufficient to satisfy all of the financial obligations incurred in connection
with the Acquisition.

     The successful operation of the Drax Power Station is affected by, among
other things, general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. Changes in these factors could
make it more expensive to operate the Drax Power Station, could require
additional capital expenditures or could reduce certain benefits currently
available. In addition to the other risks identified in this section, a variety
of other risks may affect the Drax Power Station, some of which are beyond our
control, including:

     o    the Drax Power Station could perform below expected levels of output
          or efficiency;

     o    coal supply could be interrupted or unavailable;

     o    operating costs could increase;

     o    delivery of electrical energy to and from the Drax Power Station by
          and to The National Grid Company plc ("NGC") could be disrupted;

     o    environmental problems could arise which could lead to fines,
          curtailment or a shutdown of the Drax Power Station and new
          environmental legislation or regulations could require an increase in
          operating or capital expenditure or a constraint on the output of the
          Drax Power Station;

     o    the units and equipment could break down or fail in the future;

     o    the Drax Power Station could suffer labor disputes;

     o    the UK Government could change permit or governmental approval
          requirements which could result in curtailment of the output of the
          Drax Power Station or otherwise affect the operating environment of
          the Drax Power Station;

     o    third parties could fail to perform their contractual obligations, as
          in the case of TXU Europe;

     o    catastrophic events, such as fires, earthquakes, explosions, floods,
          severe storms or other occurrences, could affect the Drax Power
          Station, NGC or any of the principal suppliers of coal and other
          inputs;

     o    new energy technologies could make the plant obsolete or less
          competitive; and

     o    two-shifting could lead to a higher rate of tube leaks and other
          outages.

     We cannot assure you that none of these events will happen.

Dependence Upon Performance by Third Parties

   Our ability to generate cash flow to make any payments on our debt
   obligations depends on unrelated third parties fulfilling their commitments.
   Even if third parties fulfill these obligations, we do not expect to generate
   sufficient cash to make any payments on the notes.

     Our ability to make payments of principal, premium, if any, and interest on
our debt obligations, may be materially and adversely affected by the
performance of third parties, whom neither we nor any other AES Drax company
control, under commercial agreements to which AES Drax is a party. For example,
TXU Europe and TXU Europe Group, the parent of TXU Europe, failed to perform
their obligations under the Hedging Contract and the related guarantee,
respectively. The Hedging Contract was terminated and no alternative long-term
hedging arrangement exists. As a result, the Drax Power Station is currently
operating under its Electricity Contracting Policy (a policy agreed with the
senior creditors) as a purely merchant power plant, selling electricity under
trades covering periods of between 30 minutes and several months ahead and is
entitled to sell electricity forward for a period not exceeding December 31,

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<PAGE>


2003. However, the ability of the Drax Power Station to sell electricity forward
is constrained not only by the Electricity Contracting Policy but also by the
availability of credit to support trading in form of letters of credit issued to
AES Drax's trading counterparties.

     Other third parties upon whom AES Drax depends include, among others:

     o    Innogy plc (formerly National Power plc) under an IT Support Services
          Agreement and Technical Support Agreement;

     o    UK Coal Limited (formerly RJB Mining (UK) Limited) under the Agreement
          for the Sale of Coal;

o NGC under the Connection and Use of System Code, which relate to the
transmission of power to and from the Drax Power Station;

o    Signatories to the Balancing and Settlement Code; and

o Buxton Lime Industries Limited and its affiliates under the Limestone Supply
Agreement.

     We refer to these commercial agreements, together with the other documents
and agreements relating to the Drax Power Station, as the project documents.

     AES Drax may not be able to obtain alternative customers, supplies, goods
or services to cover non-performance of third parties if any of these third
parties:

o    claim that their project documents were not duly authorized by them;

o    repudiate their obligations under their project documents;

o    fail to perform their contractual or other obligations;

o        are excused from performing their obligations because AES Drax has
         failed to perform its obligations or because an event has occurred
         outside of AES Drax's or their control; or

o become unable to perform their obligations under their project documents due
to bankruptcy, insolvency or any similar occurrence.

RISKS RELATING TO SUPPLY

   Following the expiry of the coal supply agreements, the Drax Power Station
   may be adversely affected by an inability to obtain coal at reasonable
   prices.

     AES Drax has entered into an agreement to obtain coal supplies from UK Coal
Limited (formerly RJB (UK) Mining Limited), covering approximately two-thirds of
its coal requirements from 2001 through to 2005, as well as several small
short-term supply contracts with other UK coal producers. As part of the
restructuring process, the strategy that AES Drax will employ in relation to
coal purchasing will be under consideration in conjunction with the senior
creditors.

     Coal can be purchased on a long-term, medium-term or spot basis. Although
medium- to long-term contracts may offer a degree of security of supply to the
purchaser, historical figures indicate that spot buying is a more cost-effective
option. Conversely, although the international spot market for coal is
relatively large, there can be no assurance of availability of supply if medium-
to long-term contracts are not entered into. In either case, AES Drax relies on
third-party suppliers for the delivery of coal and it is exposed to the risk of
non-performance by these parties.

     There can be no assurance that fuel prices will not increase or that
increased fuel prices would not have a material adverse effect on AES Drax's
results of operations which could adversely affect free cash flows generated by
AES Drax.

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Dependence on Local Resources

   AES Drax may incur additional costs if it is to dispose of ash locally or
have access to the local water supply.

     Ash produced by the Drax Power Station is currently sold or deposited in
the Drax Power Station's Barlow ash disposal site. Although it is anticipated
that there will be sufficient capacity at the site until at least 2014, this may
change due to any increase in total electricity generation or any decrease in
ash sales. At that time, AES Drax will be required to obtain regulatory
approvals in order to expand the Barlow ash disposal site. If the ash is
required to be disposed of at other sites, AES Drax may incur additional costs.

     The Drax Power Station currently abstracts a large portion of the water
used in its operations from the river Ouse and supplements the supply with
on-site groundwater. The UK Environment Agency has indicated that it may reduce
the allowable quantities of water to be abstracted under the AES Drax license
and may significantly increase license fees. During 2002 such fees increased by
approximately 4.8% and the same fees for 2003 are estimated to increase by a
further 4.1%. (See also "Information on the Company--Environmental Matters and
Regulation--Future Legislation.") If the lower levels of abstraction are not
sufficient to service the Drax Power Station's needs, the plant may need to use
recycled effluent part of the time, which is likely to cause increased operating
and maintenance costs. In addition, capital expenditures may be necessary if the
capacity of the effluent treatment plant is not sufficient to treat the required
quantities.

RISKS ARISING FROM THE MARKET, REGULATION AND DEREGULATION

Dependence on the Market for Electricity in England and Wales

   AES Drax's ability to generate cash flow depends on the Drax Power Station's
ability to sell power.

     The market for wholesale energy, installed capacity and ancillary services
in England and Wales is largely deregulated. Owners of electricity generation
facilities such as AES Drax are not guaranteed any specified rate of return on
their capital investments or recovery of their costs. Therefore, the revenue
generated is dependent on electricity trading contracts which AES Drax may enter
into from time to time with trading counterparties which, as a merchant plant,
forms the bulk of the revenue of AES Drax. In addition, AES Drax may sell its
output in the balancing mechanism under NETA. Among the factors that will
influence prices AES Drax can obtain for its energy, all of which factors are
beyond AES Drax's control, are:

     o    the impact of extended periods of low electricity prices due to
          significant over-capacity of generation, increased competition and a
          lack of incentive for companies to invest in constructing and
          commissioning new power plant;

     o    failure to enter into bilateral contracts for sales of energy or
          installed capacity due to, among other things, availability of credit
          support for trading;

     o    the likelihood of more stringent environmental regulations in the UK
          which could restrict the Drax Power Station's ability to operate or
          affect its competitiveness relative to other power stations.

     o    a decrease in natural gas prices relative to coal, which would make
          gas-fired power stations more competitive with the Drax Power
          Station;

     o    prevailing market prices for coal;

     o    the extent of additional supplies of electric energy, installed
          capacity and ancillary services from current competitors of the Drax
          Power Station or new market entrants, including sales from foreign
          electricity producers into the UK, and the development of new power
          stations that may be able to produce energy less expensively than the
          Drax Power Station;

     o    the effect of NETA on customers and competitors in the electricity
          supply market and how certain competitors deal with excess supply or
          low market prices. Certain competitors have already mothballed plant
          and there has been a tightening of credit requirements following the
          demise of Enron;

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<PAGE>


     o    the impact of the support provided by the UK government to British
          Energy;

     o    the extended operation of nuclear generating plants selling
          electricity under NETA or otherwise and in adjacent markets beyond
          their presently expected dates of decommissioning;

     o    the extent of additional supplies of energy or energy-related
          services resulting from an increase in physical transmission capacity
          in the wholesale electricity trading market or otherwise;

     o    weather conditions prevailing in England and Wales from time to time;

     o    the possibility of a reduction in the projected rate of growth in
          electricity usage as a result of such factors as regional economic
          conditions and the implementation of conservation programs; and

     o    export power transmission constraints, which would limit the ability
          of the Drax Power Station to sell energy, installed capacity and
          ancillary services in adjacent markets in which prices may be higher
          than otherwise.

     As a result of a number of the factors cited above the Drax Power Station
has not been able to generate sufficient cash to satisfy all of its Subsidiary
Obligations and is currently in discussions with its senior creditors about a
debt restructuring. See "Information on the Company--Significant Developments
During 2002 and Recent Developments" and "Operating and Financial Review and
Prospects--Liquidity and Capital Resources."

     Any such restructuring may well prevent any distributions to permit any
payments to be made on the notes or otherwise provide for no recovery on the
notes.

Changes in Electricity Regulation Applicable to England and Wales

     In connection with the concerns of OFGEM, the principal regulator of the
electricity industry in England and Wales, which we sometimes refer to herein as
the Regulator, over the fairness and transparency of the pricing mechanism for
electricity in England and Wales, the UK Government replaced the pool
arrangements for the trading of wholesale electricity in England and Wales with
NETA, which was implemented on March 27, 2001. NETA was implemented to improve
market information and transparency, enhance liquidity and reduce the
opportunities for the exercise of market power by generators. There have been
numerous changes implemented in the two years since NETA was implemented and
energy regulation continues to change and develop. Although NETA has impacted
electricity prices, NETA has not generally been considered to be the principal
underlying cause behind the decline in UK power prices; this is more likely due
to the over-capacity in the UK generation market, increased competition and
fragmentation of the market. As a result, we cannot assure you that further
development of NETA will not have a significant adverse effect on AES Drax's
revenues and its ability to pay dividends to its shareholders in amounts which
will enable us to meet our obligations under the notes. Failure to receive
dividends indirectly from AES Drax will materially adversely affect our ability
to make any payments on the notes.

     NETA includes a Balancing and Settlement Code: if a generator's output does
not match its contracted position, it is required to pay out-of-balance charges
and/or penalties. If AES Drax is unable physically to generate to its contract
position, the payment of such out-of-balance charges and/or penalties could be
significant.

     The electricity industry in England and Wales is subject to extensive legal
and regulatory controls to ensure, among other things, that reasonable demand
for electricity is satisfied, that proper safety standards are maintained and
that competition is promoted in the electricity generation and supply markets.
It is expected that the regulators will continue to scrutinize closely the
electricity industry and may from time to time intervene in a manner that may
have a material impact on future revenues to be earned from the Drax Power
Station.

     The operations of the Drax Power Station could be adversely affected if it
     cannot comply with regulatory standards.

     The Drax Power Station is subject to extensive EU, national and local
statutory and regulatory standards, laws and regulations governing, among other
things, limits on discharges to air and water, noise emissions, the generation,
storage, handling and use of waste and health and safety standards. The Drax
Power Station is also required to maintain numerous permits and governmental
approvals for its operations. In the ordinary course of its business, the Drax
Power Station

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<PAGE>


has pending applications for new, or renewals for existing, permits and
governmental approvals. Such pending applications relate to increased limits on
SO2 emissions and the ability to burn biomass in lieu of coal and petcoke. If
AES Drax fails to obtain, renew or maintain the permits and governmental
approvals required to operate the Drax Power Station or to comply with, or to
satisfy new conditions of, such standards, laws, regulations, permits and
governmental approvals, it could incur material costs or liabilities, fines or
penalties or other sanctions, including the limitation or suspension of
operations.

     Because the laws and regulations affecting the Drax Power Station and AES
Drax are complex, constantly changing, possibly applied retroactively and
generally becoming increasingly stringent, changes in these laws and regulations
may cause increased compliance costs, the need for additional capital
expenditures or the reduction of certain benefits currently available to the
Drax Power Station. These laws and regulations could also expose AES Drax to
liabilities, including remediation liabilities, relating to previous operations
or for actions taken or conditions caused by third parties. Under the terms of
the project documents, AES Drax is responsible for paying all costs resulting
from changes in or enforcement of all statutes, regulations and permits. AES
Drax's failure to comply with any such statutes or regulations or any change in
the requirements of such statutes or regulations could result in civil or
criminal liability, the limitation or suspension of operations, imposition of
clean up liens, fines or penalties and large expenditures. We cannot assure you
that the Drax Power Station has been or will be at all times in complete
compliance with such standards, laws, regulations, permits and governmental
approvals or that AES Drax will not incur material costs, liabilities, fines or
penalties or suffer other sanctions, including the limitation on or suspension
of operations in the future. Further, we cannot assure you that the costs of
complying with current and future environmental and health and safety standards,
laws and regulations and any liabilities arising from current or past operations
will not adversely affect AES Drax's business, results of operations or
financial condition.

Uncertainties Associated with Insurance

   Although AES Drax is required to maintain insurance under the Subsidiary
   Obligations and the indenture for the notes, loss proceeds might not be
   sufficient to satisfy our obligations under the Subsidiary Obligations and
   the notes.

     Under the original terms of the Subsidiary Obligations, AES Drax was
required to maintain property, business interruption, earthquake, catastrophic
and general liability insurance for the Drax Power Station in accordance with
the minimum insurance requirements contained in such financing documents. AES
Drax was unable to obtain insurance in accordance with the minimum insurance
requirements under the bond indenture, therefore, following discussion with the
Senior Lenders, it was agreed that AES Drax would seek to renew the insurance on
the basis of material damage cover only initially and during the 6 month period
following November 27, 2002 would examine the options for re-introducing
business interruption coverage. Accordingly, in November 2002, AES Drax Holdings
entered into a supplemental indenture with respect to the bonds to amend the
minimum insurance requirements to reflect the following:

     (i)  A maximum deductible not to exceed (pound)5 million each and every
          loss and which shall not be subject to an annual aggregate
          deductible.

    (ii)  The minimum sum insured shall be $1 billion ((pound)600 million) in
          respect of Property (Material Damage) "All Risks" Insurance. Business
          interruption insurance shall not be required for a period of six
          months from November 27, 2002.

     The premium under AES Drax's current coverage is approximately (pound)5.2
million per annum (plus Insurance Premium Tax (IPT)), a reduction of
approximately (pound)6 million from our previous annual premium, in part due to
the coverage not including business interruption.

     We cannot assure you that these insurance policies will be available in the
future on commercially reasonable terms or that the amounts for which AES Drax
is insured or which AES Drax receives under such insurance policies will cover
all losses. If AES Drax suffers an insurable loss, the insurance proceeds
received by it may not be sufficient to cover the business loss, to repair and
reinstate the affected facilities or to satisfy all the Subsidiary Obligations
and payments of principal, premium, if any, interest and other amounts on the
notes. Given the historically cyclical nature of the insurance market, while the
insurance premiums originally forecast for the life of the Subsidiary
Obligations were, in the

                                      17

<PAGE>


view of the independent insurance adviser, reasonable estimates in light of
current market conditions, actual premiums may be significantly higher than
those projected.

Item 4.  Information on the Company

History and Development of the Company

   The Drax Power Station

     The Drax Power Station is a 3,960MW (gross) pulverized coal-fired power
station located in North Yorkshire, England on the banks of the river Ouse
between the towns of Selby and Goole. In the year ending December 31, 2002, the
Drax Power Station accounted for approximately 8% of electricity generated in
England and Wales. It is one of the largest coal-fired power stations in Western
Europe. For a summary of AES Drax's intended operating strategy for the Drax
Power Station, see "--Business Overview--Business Strategy."

     The Drax Power Station was commissioned in two 1,980MW stages in 1974 and
1986, respectively, and comprises six 660MW (gross) coal-fired steam turbine
generating units and three operational 25MW gas-oil fired open-cycle gas turbine
(OCGT) generating units. Each of the 660MW units is designed to operate wholly
independently, being able to be dispatched, ramped up or down and put on or off
line without affecting the operating capabilities of the other units.
Additionally, the Drax Power Station has the capacity to start up and shut down
on a daily basis, each within a relatively short period of time giving it the
ability to run during times of high market prices and shut down during times of
low market prices. We refer to this capacity as an ability to operate on a
two-shift basis.

     The Drax Power Station was constructed by the Central Electricity
Generating Board, which we refer to as the CEGB. The CEGB's large base load
power stations are noteworthy for their technical reliability and longevity.
Base load generating facilities are electric generating stations that are on
line (synchronized with the grid) at full capacity or near full capacity almost
all of the time. The Drax Power Station has historically demonstrated high
availability and net thermal efficiency.

     The Drax Power Station is fully fitted with wet limestone-gypsum Flue Gas
Desulphurization, referred to as FGD, which was commissioned in the early 1990s.
The FGD plant has an original design life of 40 years and is currently the
largest of its kind in the world, capable of removing at least 90% of the sulfur
dioxide ("SO2") from boiler gases emitted from coal that has a sulfur content of
up to 2.8% by weight. As a result, with the FGD system, the Drax Power Station
is able to burn coal from a variety of sources and remain in compliance with the
currently applicable environmental standards.

     The Drax Power Station is located on a site of approximately 1,850 acres.
It has road and rail access and is close to supplies of coal, cooling water and
limestone.

                                      18
<PAGE>


Significant Project Parties

     Set forth below is a diagram indicating the principal contracts and
contract parties either providing inputs to or purchasing electricity or other
outputs from the Drax Power Station. The details of the agreements with the
parties included in the table below are described in the "Summary Description of
the Principal Agreements Relating to the Acquisition", which has been
incorporated by reference herein from our F-4 Registration Statement, except
that the Hedging Contract was terminated on November 18, 2002 as described below
in "Operating and Financial Review and Prospects -Termination of the Hedging
Contract." In addition, on April 28, 2003, the ash marketing agreement with
National Ash was replaced by a contract with Hargreaves Coal Combustion
Products, the summary terms of which are described below.

                               [GRAPHIC OMITTED]


                                      19
<PAGE>


Ash Marketing Agreement

     Under an ash marketing agreement AES Drax has appointed Hargreaves Coal
Combustion Products Ltd ("Hargreaves CCP") as its ash-marketing manager,
effective from April 29, 2003. The agreement continues in force for a period of
three years unless extended by the parties or terminated in accordance with its
terms. The ash marketing agreement sets out the services that Hargreaves CCP
will provide in its capacity as ash marketing manager, including sales and
marketing, customer and account management and product development. In exchange
for the service elements AES Drax will pay Hargreaves CCP an annual fee of
(pound)144,000 set at current sales volumes of 77% of ash products produced. An
additional incentive payment will be payable of up to (pound)20,000 for a
maximum sales volume of 100% achieved. AES Drax does not warrant the quality of
ash supplied under the ash marketing agreement or its suitability for any
particular purpose.

     Liability.  The total aggregate liability of Hargreaves CCP shall not
exceed the contract value.

     Force Majeure. An event of force majeure may suspend the exercise of rights
and performance of obligations by each party. If any such event of force majeure
continues for six months, either party may terminate the agreement.

     Indemnification. Hargreaves CCP will indemnify AES Drax against all claims
and liabilities arising from any contract of employment (including on
termination) with, or any duty or liability of AES Drax to, any Hargreaves CCP
employee engaged to provide services under the agreement.

     Termination. AES Drax may terminate the agreement upon breach of a material
obligation that is not remedied within 30 days after receipt by Hargreaves CCP
of notice from AES Drax and also in the event of certain insolvency or
enforcement events. Hargreaves CCP may also terminate the agreement 30 days
after the receipt by AES Drax of notice from Hargreaves CCP of the occurrence of
certain material breaches and on the occurrence of any insolvency or enforcement
events or if payments due to Hargreaves CCP in respect of the provision of the
services are not received for a period of 60 days and remain unpaid and not
disputed in good faith for 30 days from the date on which Hargreaves CCP
provides written notice to AES Drax. AES Drax has the right to terminate at any
time and for any reason giving Hargreaves CCP 30 days written notice. AES Drax
shall pay Hargreaves CCP fair and reasonable compensation for the
work-in-progress at the time of termination but such compensation shall not
include loss of anticipated profits or any consequential loss.

Financing

     The financing of the Acquisition and the subsequent refinancing of certain
bridge loans (through the issue of the notes) was structured to enhance the cash
flows available to service the Eurobonds, certain related swaps and the bonds
and to make distributions, including to enable us to service the notes. AES made
an aggregate equity contribution to the AES Drax group of companies of
(pound)413 million, which contributed towards a total funding cost of the
Acquisition of (pound)1,963 million. The financing of the Acquisition and the
related transactions were structured as follows:

     o    The cost of the Acquisition was funded by (i) AES Drax Holdings
          issuing the Eurobonds ((pound)1,725 million), which were subscribed
          in full by InPower Limited and the proceeds of which were contributed
          to AESD, and (ii) (pound)189 million of equity contributed indirectly
          to AESD by AES (a portion of AES's total equity contribution of
          (pound)413 million).

     o    The subscription price for the Eurobonds was funded by InPower
          Limited (i) receiving a secured bank loan of (pound)1,300 million,
          which we refer to as the Bank Facility, and (ii) selling a future
          right to subscribe for shares of AES Drax Holdings to AES Drax
          Acquisition Limited for an upfront payment of (pound)425 million.

     o    The forward purchase of shares was funded by AES Drax Acquisition
          Limited receiving (i) (pound)221 million by way of equity
          contributions funded with a portion of the proceeds of the (pound)250
          million in bridge loans borrowed by AES Drax Power Finance Limited
          (reduced by financing costs and the funding of the first year's
          interest payments required by the bridge loans retained by AES Drax
          Power Finance Limited and after expenses) and (ii) (pound)224 million
          of additional equity contributed indirectly by AES (the remaining
          portion of AES's equity contribution).


                                      20
<PAGE>


o        The proceeds from the issuance of the notes together with amounts in
         the AES Drax Power Finance Limited debt service reserve account were
         used to refinance the bridge loans made by affiliates of the initial
         purchasers of the notes to AES Drax Power Finance Limited referred to
         above in an aggregate principal amount of (pound)250 million, plus
         accrued interest to the date of repayment. The remaining portion of the
         proceeds of the notes were used to fund a debt service reserve account
         for the notes as well as to pay certain fees and expenses related to
         the offering of the notes.

     AES Drax Holdings' payment obligations under the Eurobonds are guaranteed
by AES Drax Acquisition Limited, AES Drax Electric Limited, AES Drax Limited,
AES Drax Power Limited and AES Drax Financing Limited. These guarantees are
secured by mortgages and charges over the assets of these companies, including
share mortgages. The holders of the bonds receive the same guarantees, rank pari
passu with and share in the same security arrangements with the fixed coupons on
the Eurobonds and amounts due to counterparties under AES Drax's and AES Drax
Holdings' currency and interest rate swaps and senior to (in right of
distribution of proceeds from any enforcement), among other things, payment of
the principal of the Eurobonds.

     The primary source of funds for InPower Limited to repay the Bank Facility
is payment of fixed coupons on the Eurobonds, together with certain swaps.
InPower Limited's rights and obligations under the Bank Facility are
substantially the same as AES Drax Holdings under the terms and conditions of
the Eurobonds. Repayments under the Bank Facility are an obligation of InPower
Limited and are not an obligation of AES Drax Holdings or any of its affiliates.
However, InPower Limited and BondPower Limited, as assignee of the principal on
the Eurobonds, have secured InPower Limited's obligations under the Bank
Facility by a first priority charge over the Eurobonds (including the coupons)
in favor of the syndicate of banks under the Bank Facility, the Senior Lenders.
Therefore, the Senior Lenders benefit indirectly from the security and
guarantees granted to InPower Limited and BondPower Limited in respect of the
Eurobonds (including the coupons).

     In connection with the issuance of the bonds on August 2, 2000, the
proceeds were applied to prepay a portion of the fixed coupons on the Eurobonds
and, in turn, to reduce the amount outstanding under the Bank Facility. In
connection with such prepayment, the Senior Lenders, InPower Limited and
BondPower Limited agreed to security arrangements whereby the proceeds of any
security will be shared on a pari passu basis between, inter alia, the bonds and
the fixed coupons on the Eurobonds (and indirectly the Bank Facility). Voting
rights, in respect of the Eurobonds, will be exercised by the trustee for the
Eurobonds acting, ultimately, on the instructions of the Senior Lenders pursuant
to the security documents in respect of the Bank Facility among others. See
"Discussion and Analysis of Financial Condition--Intercreditor Arrangements" in
the F-4 Registration Statement, which description is hereby incorporated by
reference herein.


                                      21
<PAGE>


Organizational Structure

Structure of the Acquisition and Refinancing

     Set forth below is the structure established in connection with the
acquisition of the Drax Power Station and refinancing of the project and
reflecting the transfer of AES Drax Financing Limited's shares in AES Drax
Limited to AES Drax Electric Limited in 2002. This structure includes certain
entities unaffiliated with AES that were included in the Acquisition as part of
its financing to maximize cash flows. On November 18, 2002 AES Drax Financing
Limited sold its 10% stake in AES Drax Limited to AES Drax Electric Limited.
Except as otherwise stated, shareholdings are 100%.

                               [GRAPHIC OMITTED]


                                      22
<PAGE>


The Company, its Guarantors and AES

The Company

     We are an exempted company incorporated with limited liability under the
laws of the Cayman Islands. We were incorporated on February 28, 2000 in order
to issue the notes. Our only asset is 99% of the issued and outstanding share
capital of AES Drax Power Finance Limited, and all of the issued and outstanding
share capital of AES Drax Energy II Limited, which owns the remaining 1% of the
share capital of AES Drax Power Finance Limited. AES owns indirectly all of our
capital stock. The mailing address of our principal offices is 18 Parkshot,
Richmond, Surrey TW9 2RG, United Kingdom (Telephone +44(0) 207 334 5300).

Our Guarantor

     The guarantor under the notes is AES Drax Power Finance Holdings Limited, a
company incorporated under the laws of England and Wales on November 12, 1999.
The guarantor's only asset is all of our issued and outstanding share capital,
which it has pledged as security for its limited guarantee of our obligations
under the notes. The guarantor has no previous operating history as it was
formed solely for the purpose of acquiring the Drax Power Station. The mailing
address of the guarantor's principal executive offices is 18 Parkshot, Richmond,
Surrey TW9 2RG, United Kingdom (Telephone +44(0) 207 334 5300).

AES

     The AES Corporation ("AES"), founded in 1981, is a leading global power
company. AES's goal is to help meet the world's need for electric power in ways
that benefit all of its stakeholders. AES participates primarily in four lines
of business: contract generation, competitive supply, large utilities and growth
distribution. The contract generation line of business consists of multiple
power generation facilities located around the world that, provided that the
counterparty's credit remains viable, have entered into power purchase
agreements with initial durations of 5 years or greater accounting for 75% or
more of their capacity. The competitive supply line of business consists of
generating facilities that sell electricity directly to wholesale customers in
competitive markets. These generating facilities generally sell less than 75% of
their output pursuant to long-term contracts with pre-determined pricing
provisions and/or sell into power pools under shorter-term contracts or into
daily spot markets. The large utility business is comprised of three utilities
in the United States, Brazil and Venezuela, respectively. All are of significant
size and in most cases combine generation, transmission and distribution
capabilities and are subject to extensive local, state and national regulation.
The growth distribution line of business includes distribution facilities facing
particular challenges relating to operational difficulties that are located in
emerging markets and often offer significant potential for improved financial
and operational performance.

     Restructuring

     In 2002, AES established a Restructuring Office, formerly referred to as
the Turnaround Office, to focus on improving the operating and financial
performance of, selling or abandoning certain of its underperforming businesses.
Businesses are considered to be underperforming if they do not meet AES's
internal rate of return criteria, among other factors. The Restructuring Office
is actively managing the AES Drax companies as well as other of AES's
businesses. AES is evaluating whether the profitability and cash flows of such
businesses can be sufficiently improved to achieve acceptable returns on its
investment, or whether such businesses should be disposed of or sold. It is
possible that the restructuring efforts will change the ownership structure or
the manner in which a business operates.

     Also in 2002, AES changed certain senior management positions, including
the Chief Executive Officer position. These changes were accompanied by a shift
in management philosophy to a more centralized organizational structure in
certain functional areas.

     AES has announced a number of strategic initiatives designed to decrease
its dependence on access to the capital markets, strengthen its balance sheet,
reduce the financial leverage at the parent company and improve short-term
liquidity. In 2002, AES took $2.3 billion of asset impairment charges at Drax,
Barry, Eletropaulo and CEMIG.


                                      23
<PAGE>


Business Overview

Property, Plant and Equipment

     The Drax Power Station

     Consisting of six 660MW boiler turbine generators with a nominal installed
aggregate capacity of 3,960MW, the Drax Power Station has consistently
demonstrated high availability and efficiency. The Drax Power Station reflects a
high standard of design and construction typical for large base load power
stations constructed by the CEGB, the predecessor owner before the privatization
of National Power plc. Six open cycle gas turbine generating units were
originally installed at the station in a separate generation turbine house,
exhausting through a common stack to provide standby power to start up the main
generating plant. Only three open cycle gas turbines (Units 9, 10 and 12) are
now operational although the other three could be re-commissioned if required.
The three operational open cycle gas turbines, which have an installed capacity
of 35MW, are only tested to 25MW at quarterly intervals since this is now their
contracted requirement under the ancillary services agreement with NGC.

     The Drax Power Station was constructed in two phases with the first three
660MW units installed in 1974, and the second three units installed in 1986. In
the early 1990's FGD was retrofitted to all six units, enabling the station to
operate within currently applicable environmental emission restrictions. The
Drax Power Station has, historically, demonstrated high availability (it has
averaged 87% over the last five years) and net thermal efficiency of
approximately 38%, which compares favorably with the range expected for similar
large coal-fired power stations of 35% to 39%. In 2002, there was a decline in
both availability and net thermal efficiency as a result of the impact of the
lower generation levels and increased number of starts (each start results in an
element of plant damage). Much of this was caused by the manner in which TXU
Europe called power from the plant under the Hedging Contract, which resulted in
an increased level of two-shifting.

     The Drax Power Station has a secure connection to the grid exporting power
at 400KV. It can import power from a 132KV outdoor substation adjoining the site
(controlled by Yorkshire Electricity) for internal consumption (some of the
works power must be imported from the substation).

     The Drax Power Station is fully fitted with FGD, commissioned in the early
1990s. The FGD plant has an original design life of 40 years and is currently
the largest of its kind in the world, capable of removing at least 90% of the
sulphur dioxide (SO2) from boiler gases emitted from coal with sulphur content
of up to 2.8% by weight. Most coal available in England and Wales, including
from the Selby pit (currently its main supplier though the owner of the pit, UK
Coal Limited, has announced that it will be phasing out production at Selby with
it closing in early 2004), meets this criteria and large quantities of coal
available on the international market has an even lower average sulphur content
that allows the Drax Power Station to comply with applicable limits on sulphur
dioxide emissions. As a result, with the FGD system, the Drax Power Station is
able to burn coal from a variety of sources while in compliance with the
currently applicable environmental standards. See "--Impact of Fuel Supply
Changes".

Changes to the Electricity Market in England and Wales

     Until March 27, 2001, electricity in England and Wales was traded between
generators and suppliers through a day-ahead market in England and Wales, known
as the Pool, which was administered by NGC. The Pool was used to determine which
generating sets are called to satisfy demand at any particular time and what
price was received by them. This price was set by the marginal price for sales
of electricity as described in "--The Electric Industry in England and Wales"
below.

     The New Electricity Trading Arrangements, which we refer to as NETA
replaced the Pool on March 27, 2001. NETA includes a long-term forward and
futures market, a voluntary bilateral market, a balancing market allowing last
minute trading to take account of immediate supply and demand imbalances and a
settlement process, replacing the Pool with a mixture of bilateral and traded
contracts. OFGEM (formerly OFFER), the principal regulator of the electricity
industry in England and Wales, intends that NETA should assert downward pressure
on prices through more competitive and efficient trading and facilitate greater
market price transparency and increased flexibility to meet demand by trading
closer to real time. See "--The Electricity Industry in England and
Wales--Regulation under the Electricity Act 1989 and the Utilities Act 2000".


                                      24
<PAGE>


     The Utilities Act 2000, which we refer to as the Utilities Act, became law
on July 28, 2000. Pursuant to powers under the Utilities Act, electricity
licenses were modified in order to conform them to NETA.

Coal Supply

     AES Drax's coal supply is currently met through an agreement with UK Coal
Limited to obtain coal supplies covering some two-thirds of its coal
requirements from 2001 through to 2005 and several small short-term contracts
with other UK coal suppliers.

     Most of the coal is delivered to the site by rail, but road transport,
although more expensive, is also possible, subject to certain limits under
licenses. The rolling stock for transporting the coal is provided by English,
Welsh and Scottish Railway Limited and Freightliner Heavyhaul Limited. In
addition, there is a storage capacity at the site of about 3.1 million tonnes.
As at March 31, 2003 approximately 750,000 tonnes were held in stock, an amount
sufficient to satisfy between four to five weeks of electricity generation at
full load. The minimum amount required for compliance with the Bank Facility is
700,000 tonnes.

     The Drax Power Station has successfully completed coal burning trials on
coals from United States, South African and UK pits (other than Selby, its
current main supplier) and, as a result, AES Drax believes that coal from other
sources can be utilized if and when necessary. Although the existing coal
blending facilities limit the capacity to blend different types of coal, an
upgrade could be implemented depending upon AES Drax's coal purchasing strategy.

     The Drax Power Station's FGD provides a competitive advantage in designing
a fuel procurement strategy as it enables a range of coals, including those with
a relatively high sulphur content, to be burned while generally remaining in
compliance with applicable environmental standards. The coal storage facilities
provide further flexibility as, in the event a given coal supplier fails to meet
its obligations, the storage facilities allow the Drax Power Station to continue
to operate for up to five weeks while locating another source of coal supply.

     The coal handling system is configured in accordance with industry practice
and has a level of redundancy consistent with its CEGB heritage. In recent years
the plant has undertaken significant remedial work, including upgrading and
replacing the mobile plant. Therefore, other than overhauls, no further major
expenditures are currently expected. Upgrades of the rest of the system have
also been undertaken which now provide the Drax Power Station with a processing
capacity of up to 3,800 tonnes per hour.

Impact of Fuel Supply Changes

     The closure of the Selby mine complex in Spring 2004 will potentially
increase the average level of sulphur in the coal supplied to AES Drax.
Approximately 50% of the coal consumed at AES Drax is currently supplied from
the Selby mine which has a low/medium sulphur content of around 1.1%. UK Coal
Limited has recently issued a written statement to the effect that when Selby
coal is replaced from other UK sources, the average level of sulphur will
increase to 1.9%. In anticipation of this change in quality, AES Drax submitted
an application to the Environment Agency in December 2002 for an increase to its
annual SO2 emission limit (contained in its Integrated Pollution Control
Authorization (see "--Environmental Matters and Regulation--Integrated Pollution
Control") to 60,000 tonnes per annum. However, there is no obligation on AES
Drax under its current contractual arrangements with UK Coal Limited to accept
coal with a sulphur content higher than the maximum annual sulphur limit
currently specified in the contract with UK Coal Limited of 1.35%.

     This recent submission is an annex to an earlier application made in July
2000 based on the same request to increase SO2 emissions. At that time, the
Environment Agency concluded that there was insufficient information to justify
an increase in SO2 limits, based on the sulphur content of coal. However, the
Environment Agency conceded that it would consider any future scenarios in the
light of changes in fuel availability.

     The Environment Agency has recently requested that AES Drax provide
detailed justification to support the assertion that the coal sulphur content of
the fuel from UK Coal Limited will increase to 1.9%, and to provide other
options for supplying lower sulphur coal. AES Drax is considering alternative
coal supply sources. This issue is currently the subject of discussions between
AES Drax and UK Coal Limited and other coal suppliers.


                                      25
<PAGE>


Alternative Fuels

     AES Drax is exploring the possibility of burning alternate fuels at the
Drax Power Station, two of which are petcoke and certain forms of biomass.

Operation and Maintenance History

     Routine maintenance, excluding repair of defects responsible for forced
outages, comprises the following:

   Planned Maintenance

     Until 2002, the Drax Power Station's planned maintenance strategy comprised
the following:

     o    Major outage of approximately twelve weeks duration for each unit
          every six years;

     o    Interim outage of 3 weeks (prior to 1996) and 4.5 weeks
          (subsequently) duration for each unit every three years, principally
          for boiler burner refurbishment; and

     o    Intermediate inspections (on-load inspections) for each unit at 18
          months prior to and 18 months after a major overhaul.

     However, during 2002 AES Drax proposed an adjustment to this strategy. As
part of an ongoing operational program at the Drax Power Station, AES Drax moved
to a "4 and 8 year" regime following consultation with Stone & Webster
(technical consultant acting on behalf of the banks) and insurers. This change
does not change the amount of time spent on maintenance but only affects the
maintenance cycle. Stone & Webster confirmed in their April 2002 independent
report that they had no objections to increasing the periods between the
maintenance outages.

     We note that Stone & Webster pointed out that the change to a "4 and 8
year" maintenance regime may result in the annual overhaul costs at AES Drax
fluctuating rather than being roughly constant under a "3 and 6 year" regime. In
2002, the change in strategy allowed the deferral of the major outage on Unit 2
into 2003, which generated a reduction of our maintenance costs of approximately
(pound)5.6 million. The completion of a 4-year interim outage on Unit 3 in 2002,
rather than a 3-year interim outage, ensures that the fluctuation in costs is
kept to a minimum.

     The change in the maintenance regime was included in a waiver request made
to the trustee of the Eurobonds as it was a change from the Annual Operating
Plan for 2002 previously submitted (see "Information on the Company-Significant
Developments During 2002 and Recent Developments"). The waiver was approved on
July 1, 2002.

     This outage program is still typical of maintenance practices in the UK and
worldwide power industry for major coal-fired power stations.

     The Drax Power Station is supervised by a team of operators situated in the
main control room that is operated on a 24-hour basis by teams operating on a
five shift cycle. Of the approximately 490 full-time staff, approximately 190
are engaged on full shift work with a further 100 engaged on different shift
arrangements.

   Preventative Maintenance

     Preventative maintenance is part of planned routine maintenance, which
includes replacing certain parts, particularly those subject to high wear and
tear or where failure could adversely affect operation of the plant due to
forced outage. Preventative maintenance also includes routine inspections of
highly critical components for deterioration. These practices are typical of the
industry.

Operation and Maintenance Strategy

     The Drax Power Station is well positioned to operate as a merchant plant
under NETA. Key elements of both its physical and commercial structure provide
it with the necessary characteristics to optimize cash flow and mitigate risk.
The Drax Power Station was designed as six wholly independent generating units.
Each unit can therefore be ramped up or down and put on or be taken off line
without affecting the operating capabilities of other units. The ability of the


                                      26
<PAGE>


Drax Power Station to two shift gives it the ability to run during times of high
market prices and shut down during times of low market prices. The independence
of the units combined with the Drax Power Station's two shifting capability and
flexible coal procurement strategy has allowed effective response to price
signals and demand in the market.

Station Management Strategy

     The Drax Power Station's staff has extensive experience and a high level of
technical skill from craft based qualifications to degree levels. The staff has
a deep range of qualification levels, show a broad range of experience and many
employees have worked at the Drax Power Station for between 10 and 30 years.

     Since acquiring the Drax Power Station, AES has been concentrating on
introducing its values and operating style and has been restructuring the
organization to meet that goal. AES' prime objective is to create an operating
organization and style similar to those used in place at other AES locations
worldwide. AES seeks to create a working environment that is safe and rewarding
for each AES employee.

   Implementation of the New Electricity Trading Arrangements

     On March 27, 2001, NETA was implemented in England and Wales. NETA
facilitates bilateral trading arrangements between generators, suppliers and
other traders. NETA provides mechanisms for near real-time clearing and
settlement of differences between contractual and physical positions of those
buying, selling, producing and consuming electricity. A balancing mechanism
enables the system operator, NGC, to change levels of generation and demand to
near real-time; and a mechanism for imbalance settlement provides for the
settling of the differences between net physical and net contractual positions
of parties. Initially the imbalance prices seen under the balancing mechanism
were extremely volatile. However, over the last two years, the balancing
mechanism has become more stable, which is probably a reflection of the
experience gained by both participants and the system operator (NGC) and of
changes to NETA since its implementation.

     Since the introduction of NETA, AES Drax has been successful in entering
into bilateral contracts that meet the Drax Power Station's capacity. The
termination of the Hedging Contract means that AES Drax is operating as a
merchant power plant and is exposed to market-related risks to a greater extent
than when the Hedging Contract was in force. Under the Hedging Contract,
approximately 60% of AES Drax Power's revenues were attributable to the Hedging
Contract. Currently, AES Drax has approximately 20 different counterparties to
whom sales of electricity are made under Grid Trade Master Agreements. As of
April 15, 2003 AES Drax Power had contracted the equivalent of 55% of its
capacity through September 30, 2003.


                                      27
<PAGE>


     AES Drax Power's current trading with counterparties can be summarized in
the table below. Counterparty identities and the volume of trades with each do,
however, vary from month to month.

                               [GRAPHIC OMITTED]

     From December 31, 2001 through March 2003, electricity prices have
generally been lower than in 2001 (see "Operating and Financial Review and
Prospects--Results of Operations"), though this is more likely due to the
over-capacity in the UK generation market, increased competition, the
fragmentation of the market and the impact of the failure of companies like TXU
Europe and the restructuring of British Energy, rather than the introduction of
NETA.

Business Strategy

     The ability to adapt quickly to changes in the market for electricity is an
important factor in the financial performance of AES Drax. The strategy for the
Drax Power Station remains to operate when the price for energy is above the
Drax Power Station's marginal cost (high price hours), and to shut down when the
price for energy is below the Drax Power Station's marginal cost (low price
hours). This strategy is enhanced by a two shifting plant, like Drax Power
Station, that can also operate each of its six generating units individually.
Following termination of the Hedging Contract, the Drax Power Station has
two-shifted less frequently and operated more at baseload. A decline in baseload
prices for summer 2003 may, however, see a return to a higher level of
two-shifting as the periods where prices are below the Drax Power Station's
marginal cost increase.

   Trading Strategy

     NETA requires AES Drax to enter the trading market for electricity
contracts in England and Wales. AES Drax has therefore articulated a trading
strategy which forms the basis for bilateral contracts that are designed to
facilitate the hedging of the power without acting in a speculative manner or
trading on behalf of any other entity.

     With the Drax Power Station now operating as a merchant power plant, the
Drax Power Station's trading strategy has been amended such that output from
five out of its six generating units is sold at least one week ahead, with
output of the sixth generating unit sold at 24 - 36 hours ahead.

     The following are the key features of the Drax Power Station's trading
strategy:

     Non Speculative

     AES Drax will engage in limited purchases of power to cover its contractual
position under the various forward trades that it has executed, where the output
of the plant is either restricted due to maintenance or unplanned breakdown. AES
Drax intends to pursue opportunities to enter into forward contracts and does
not expect to rely on higher prices


                                      28
<PAGE>


being achievable in the balancing mechanism. The balancing mechanism is the
primary mechanism for alleviating energy imbalances by allowing real time
trading of offers for increased generation or bids to reduce output.

     Mechanical

     Subject to the Standstill Agreement and the terms of a subsequent amendment
which limits the tenor of trades to December 31, 2003, AES Drax intends to
lessen its market timing risk by cost averaging or allocating sales or purchases
over a wide period of time rather than accumulating a position through one large
transaction at one price. This means AES Drax will seek a program of periodic
sales scheduled to take advantage of areas of the forward curve enjoying the
greatest liquidity. The pattern of sales cost averaging will ultimately be
dictated by the trading patterns that evolve in the NETA markets.

     Risk averse

     Risk will arise in NETA through plant breakdown, and regulatory and
counterparty credit exposure. Plant breakdown risk is offset in part through AES
Drax's trading strategy, whereby the sixth generating unit is not contractually
committed until 24 - 36 hours ahead of time, and an increased focus upon
reaching and maintaining higher levels of plant reliability and availability. A
generator will be obligated to pay a price calculated under the balancing and
settlement code to purchase power when its output does not match the volume of
electricity notified as sold under contracts. Where unit breakdown is known in
advance, AES Drax will seek bilateral contracts to cover the loss or will
attempt to buy power in the balancing mechanism, depending upon the volumes of
power required and those available. Under the terms of the Eurobonds, approved
contracts require AES Drax to use reasonable efforts to ensure a minimum
counterparty credit rating or credit enhancement is in place for trades to be
completed, which reduces counterparty credit risk. In addition, a maximum
duration is imposed on such approved contracts that may be entered into without
the consent of the Senior Lenders, which reduces the risk of regulatory changes
in the interim. This maximum duration is currently restricted under the
Standstill Agreement and the terms of a subsequent amendment to the end of
December 2003. See also "--Approved Contracts."

     Contracts to be sold

     Contracts sold may include firm power sales and options. Currently, firm
sales are being made for the period to the end of September 2003. Options,
covered calls and puts also may cover a range of periods but with limits set on
the volumes under option at any particular point in time. All option contracts
will be covered by actual unit availability.

     Balancing mechanism activity

     AES Drax will make offers and bids into the balancing mechanism covered by
the capability and dynamics of the physical plant. AES Drax does not intend
deliberately to generate less than its net contracted volume in the expectation
that the imbalance charge it will pay will be less than the cost to it of
generating such shortfall. Nor does AES Drax intend deliberately to generate
more than its net contracted volume in the expectation that the imbalance charge
it will receive will exceed the cost of generating such excess. Although AES
Drax has agreed not to engage in such passive participation in the balancing
mechanism, AES Drax may pursue opportunities through active participation in the
balancing mechanism by making bids and offers. This strategy has meant that AES
Drax has received approximately (pound)32.3 million of income from the balancing
mechanism in the 2 years since NETA was implemented.

     Internal procedures and management

     The Sales, Marketing and Trading Team of AES Drax is responsible for the
implementation and management of the above described strategy. No other
organization will trade on the Drax Power Station's behalf.

     AES Drax has developed a comprehensive Credit Risk Management strategy that
includes the following activities:

     o    Quarterly Risk Management Meetings, involving people from outside the
          Sales, Marketing and Trading function;

     o    Quarterly Counterparty credit reviews;


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<PAGE>


     o    Daily calculation of exposure (including mark-to-market
          calculations);

     o    Automatic alert of credit rating movements (via Moody's and others);

     o    Individual Counterparty limits.

     AES Drax's amended trading strategy (which was approved by the required
percentage of Senior Lenders with effect from July 2002), includes the following
changes:

     o    The ability to sell the 120MW that was previously required to be
          reserved to cover forced outages;

     o    The ability to enter into Back-to-Back contracts. It is not possible
          to have in place credit arrangements with all potential
          counterparties. Occasionally AES Drax may want to sell to, or buy
          from, a counterparty with whom we do not have credit and this can be
          achieved by having a third party (with the required credit) acting in
          the middle as a pass through;

     o    The ability to trade on UKPX for day-ahead and intra-day trades only.
          This power exchange is widely used in the market for this purpose;
          and

     o    The ability to accept advance payment for power. Occasionally a
          counterparty with whom we do not have credit will ask to buy power
          from us by paying in advance.

     Approved Contracts

     A contract will be an Approved Contract if it is for a term of less than or
equal to the tenor noted above, which expires on December 31, 2003. A
counterparty must have a long-term credit rating of at least Ba2 by Moody's and
BB by Standard & Poor's if for varying periods of less than one year and subject
to MW limits but a rating of at least Baa3 by Moody's and BBB - by Standard &
Poors for a contract longer than a week but less than or equal to one year
outside the relevant MW limitations. Alternatively the counterparty may provide
acceptable credit enhancement or cash collateral or cash cover acceptable to the
agent for the Senior Lenders.

     An Approved Contract must also meet the following requirements:

     o    the aggregate amount of power under such contract together with power
          to be sold under all other Approved Contracts is within the technical
          capability of the Drax Power Station during the relevant settlement
          period;

     o    the contract is physically settled;

     o    it satisfies certain limitations relating to accrual of payments
          during the relevant settlement period and limits on the aggregate MW
          subject to puts and calls; and

     o    is otherwise on arm's length terms.

Environmental Matters and Regulation

     The Drax Power Station is subject to extensive European Union, national and
local statutory and regulatory standards, laws and regulations governing, among
other things, limits on discharges to air and water, noise emissions, the
generation, storage, handling and use of waste and health and safety matters.
The Drax Power Station is also required to maintain numerous permits and
governmental approvals for its operations and generally has pending before
governmental authorities applications for new, or variations of, or renewals for
existing, permits and governmental approvals. If more stringent conditions are
imposed or variations are required or new requirements are added during the
permit application or renewal process, the Drax Power Station may be required to
increase capital expenditures or to suspend operations if such new conditions or
requirements cannot be met. While AES Drax currently incurs capital and other
expenditures to reduce output or to comply with environmental laws and
regulations, if such laws and regulations become more stringent or the Drax
Power Station's processes change, the amount and timing of such expenditures in
the future may vary substantially from those currently incurred or anticipated.


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<PAGE>


     General

     The Environmental Protection Act 1990 and the Environment Act 1995 are the
principal statutes currently governing the environmental regulation of power
stations such as the Drax Power Station.

     The Environmental Protection Act 1990 introduced a system of Integrated
Pollution Control, which we refer to as IPC, for large-scale industrial
processes, including power stations. Each power station must have an IPC
authorization that regulates the plant's discharges into the environment and
seeks to prevent or minimize pollution by using the Best Available Techniques
Not Entailing Excessive Cost (BATNEEC). The Environment Agency of England and
Wales enforces IPC.

     The Environment Agency is also responsible for the licensing and
enforcement of waste management activities. Under the Environmental Protection
Act 1990, it is a criminal offence to deposit, treat, keep or dispose of
controlled waste or knowingly cause or permit such activities, except in
accordance with a waste management license. Waste is also subject to a statutory
duty of care, which imposes obligations on parties producing and handling waste.
Non-compliance with the duty of care is a criminal offence.

     The Water Resources Act 1991 governs the pollution of controlled waters,
including groundwater and rivers, other watercourses and some areas of tidal
water. The Environment Act 1995 inserted new sections into the Water Resources
Act 1991, introducing a new power for the Environment Agency to require any
person who has caused or knowingly permitted poisonous, noxious or polluting
matter, or any solid waste matter to enter any controlled waters to carry out a
clean-up. The Environment Agency has a relatively free hand to select the person
who is easiest to find or who is most able to meet the liability.

     Additionally, the Environment Act 1995 amended the Environmental Protection
Act 1990, introducing a new contaminated land regime dealing with the clean up
of sites that have been contaminated by historic activities. This regime imposes
for the first time a positive obligation on the regulator to inspect sites, and
to issue remediation notices on "appropriate persons" requiring a clean up of
the contaminated site. For the purposes of this new regime, the appropriate
person to clean up a site will be the person who caused or knowingly permitted,
the contamination of that site. Where a regulator cannot find such a person, the
regulator can look to the owner or occupier of a site to conduct and pay for the
clean up. This regime will supplement local authority statutory nuisance powers.

     Consents for Construction, Extension and Operation of an Electricity
     Generating Station

     The Drax Power Station holds required consents, issued by the Secretary of
State, under the Electric Lighting Act of 1909 and the Electricity Act of 1989,
for the construction, extension and operation of an electricity generating power
station with a capacity exceeding 50MW. Consent was granted to the Drax Power
Station for a 3,000MW station in 1964, which consent was amended for a 4,000MW
power station in 1965. Further consents were granted in 1983, 1988, 1992 and
1993 authorizing the installation of FGD and extensions to the Barlow ash
disposal site.

     Integrated Pollution Control (IPC)

     In 1993, the Environment Agency granted an IPC authorization to the Drax
Power Station which it required for the operation of the combustion process.
This authorization has been reviewed on an ongoing basis since 1993. The IPC
authorization contains obligations including those relating to sampling and
monitoring, maintaining records and reporting to the Environment Agency. The
authorization permits the discharge of certain pollutants to air and to water
within certain parameters.

     After a lengthy consultation process, on December 21, 1999 the Environment
Agency published new authorizations for all operators of coal and oil-fired
power stations, to take effect from February 1, 2000. The aim of the new
authorizations is to achieve a 60% reduction in SO2 emissions from the
electricity supply industry by September 2005 (compared to 1996/7 levels),
bringing nationwide SO2 emissions to below 398,000 tonnes per annum.

     Under this new system, the Environment Agency has set company-wide emission
limits (B-Limits) for each generator, as well as individual emissions limits for
each individual power station (A-Limits). The AES Drax B-Limit varies according
to the Drax Power Station's load factor. Up to and including 70% load factor,
40,000 tonnes per annum are permitted, from above 70% to and including 75% load
factor, 43,000 tonnes are permitted, from above 75%


                                      31
<PAGE>


to and including 80% load factor, 46,000 tonnes are permitted and from above
80% to full load, 47,000 tonnes are permitted.

     The Drax Power Station is compliant with both its NOx and SO2 limits and
expects to continue to be so.

     The Drax Power Station has an improvement condition embodied in its
authorization, to retrofit low NOx burners to the first three units (Units 1, 2
and 3) by the end of 2003. A contract has been placed with Mitsui Babcock to
supply and fit Mk III 71MW burners to Units 2 and 3 during 2003. The retrofit
for Unit 1 was completed during its outage in 2001.

     There have been operational issues associated with the existing RJM burners
fitted to Unit 1 in 2001, and the mass emissions from the Unit are being
reported to the Environment Agency assuming concentration of 800mg/Nm3, as
opposed to the emission limit value of 650mg/Nm3. Some improvements to the
burners have been implemented, improving performance, but further evaluation and
changes are necessary. By the end of 2003, all three required units will be
fully fitted with low NOx burners.

     The UK Government is currently deciding how to implement the European
Union's Large Combustion Plant Directive ("LCPD"). There is still some
uncertainty about the outcome but it is likely that AES Drax will have to
retrofit each boiler to reduce NOx emissions to 500mg/Nm3 by December 31, 2007.
It is anticipated that over fire air ("OFA") or boosted over fire air ("BOFA")
systems will be retrofitted to each unit, at a provisional cost of (pound)2
million to (pound)2.5 million per unit.

     In addition, the implementation of the Large Combustion Plant Directive
(see "--Future Legislation") may require AES Drax to reduce NOx concentrations
to 200mg/m3 on each boiler from December 15, 2015 under the LCPD. AES Drax is
reviewing technologies that are currently available and the associated cost. All
coal-fired power plants in the UK, which wish to continue in operation beyond
2015 will need to make comparable technological modifications. Technologies,
such as selective catalytic reduction ("SCR"), and selective non-catalytic
reduction ("SNCR"), are capable of meeting the requirements of the legislation.

     It is not anticipated that the LCPD will require AES Drax to invest
significantly in its FGD equipment.

     Integrated Pollution Prevention and Control.

     The UK has implemented the EU Directive on Integrated Pollution Prevention
and Control ("IPPC") by passing the Pollution and Control Act 1999, along with
subordinate legislation. The IPCC regime will supersede the IPC regime described
above. The main differences under the IPPC regime include that it controls a
wider scope of areas including noise and solid wastes; land quality assessments
are required on application for a license and when the combustion processes
eventually terminate so that AES Drax may be required to clean up any
contamination caused by its processes; and the plant will be required to use BAT
(best available technologies), as opposed to BATNEEC (best available
technologies not entailing excessive cost). The IPPC regime is therefore more
stringent in its requirements than the IPC regime. Like the IPC regime, the IPPC
regime will be regulated and enforced by the Environment Agency. AES Drax must
apply for its Pollution Prevention and Control permit between January 1, 2006
and March 31, 2006.

     Waste Disposal

     Electricity Act consent was granted in 1971 (and extended in 1983 and 1993)
for the extension of the Drax Power Station to include its Barlow ash disposal
site. There are numerous restrictions contained in the consent and planning
agreements associated with the consents for extensions. Further detailed and
comprehensive conditions are contained in the waste management license
applicable to Barlow issued by North Yorkshire County Council in 1993 and now
controlled and enforced by the Environment Agency. The current waste management
license is due to be replaced with a Pollution Prevention Control permit, which
is designed to implement the provisions of the European Landfill Directive,
which was largely implemented in the UK under the Landfill (England and Wales)
Regulations 2002 on June 15, 2002. These Regulations are likely to have a
significant impact on the cost of operating the Barlow ash disposal site,
particularly through the requirement of higher engineering and operating
standards. Currently around 70% of Pulverized Fuel Ash is sold into the
construction industry along with substantially all Gypsum and Furnace Bottom
Ash, the remainder, along with 50% of Waste Water Treatment Plant Sludge being
deposited at the Barlow ash disposal site. The remaining 50% of Waste Water
Treatment Plant Sludge is mixed back with Gypsum and sold.


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<PAGE>


     Material deposited at the Barlow ash disposal site is liable to a Landfill
Tax Levy the rate of which is set by the UK Government and collected by UK
Customs & Excise. The standard rate of landfill tax is set to increase annually,
on the way to a medium to long-term rate of (pound)35 per tonne. Due to the
current levels of by-product sales current take up of capacity at the disposal
site is low. It is currently anticipated that there will be sufficient capacity
at the Barlow area until 2014, although this may change due to increases in
total generation and any decrease in ash sales. AES Drax will be required to
obtain regulatory approvals in order to expand the Barlow ash disposal site. If
the ash is required to be disposed of at other sites, AES Drax may incur
additional costs.

     Barlow and various locations at Drax Power Station have also been used for
the disposal of construction debris, and demolition material from the munitions
depot, which existed on the site of the ash disposal area, was disposed of at
Barlow. Although monitoring of water samples taken from Barlow has indicated
some level of contaminants in the groundwater, there is no evidence to suggest
that the operations of the Drax Power Station have contributed to such
contamination. As previously noted, however, under the new contaminated land
regimes under the Environmental Protection Act 1990 it will be possible for
individuals or companies who are not responsible for the existence of
contamination to be required to pay for its clean-up. We are not able to say
that AES Drax will not incur material expenditure in the future in respect of
site contamination.

     Water Abstraction

     Drax Power Station currently abstracts water from the river Ouse for use as
cooling water supply to the main station and for FGD and Ash Plant process
water. Water used for boiler water make-up is supplied by groundwater via
on-site boreholes. Licenses granted by the Environment Agency permit the
abstraction of water. These were reviewed and re-issued during the year 2000
with the allowable quantities of borehole water to be abstracted reduced from
3.7 million cubic meters to 2.6 million cubic meters. This reduction does not
impact on station operation but merely reflects a reduction in headroom. The
river water license conditions remain unaffected.

     Abstraction limits are due for review every 5 years with potential pressure
from the Environment Agency to reduce water volumes more likely with a current
review underway looking at the way water abstraction is charged. If future lower
limits are issued and deemed not sufficient to service Drax Power Station's
operational needs, then alternative technologies may be looked at including the
possible use of recycled effluents. This is likely to result in increased
operating and maintenance costs and would certainly require significant capital
expenditures for the installation and commissioning of a new water purification
plant (see also "--Future Legislation").

     Future Legislation

     There are a number of developments at the international, EU and national
level that may affect the emission limits imposed upon Drax Power Station in the
medium-term.

     The principal constraints are the LCPD noted above (which sets limits for
individual plant) and the National Emission Ceilings Directive (NECD)(which sets
limits on emissions from all national sources). The aim of these Directives is
to reduce emissions of sulphur dioxide, nitrogen oxides, and dust across the
European Union. They set out to limit emissions of acidifying, eutrophying
pollutants, and ozone precursors to ameliorate protection of the environmental
and human health within the Community. Another aim is to "move towards long-term
objectives set for 2015 whereby, in principle, the critical loads must not be
exceeded in any part of the Community with the final target of not exceeding
critical levels and loads in the year 2020 and of effective protection of all
people against the recognized health risks from air pollution." Neither LCPD nor
the NECD have yet been translated into UK legislation.

     Gothenburg Protocol

     In addition, the UK, on December 1, 1999, signed the Protocol to Abate
Acidification, Eutrophication and Ground-Level Ozone, which is intended to amend
the 1979 Geneva Convention on Long-Range Transboundary Air-Pollution. If
ratified, the protocol will require the UK to reduce the overall emission of
certain pollutants, including SO2 and NOx, by setting country by country
emission ceilings to be achieved by 2010.


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<PAGE>


     Kyoto Protocol

     The UK is a signatory of the 1988 Kyoto Protocol to the United Nations
Framework Convention on Climate Change. The Kyoto Protocol provides for a
significant reduction in overall emission of greenhouse gases, especially carbon
dioxide. The Kyoto Protocol sets targets to reduce greenhouse gas emissions by
around 5% of 1990 levels in the period 2008 to 2012. The UK's commitment under
the Kyoto Protocol is to reduce greenhouse gas emissions by 12.5% below 1990
levels by 2008-2012. The UK's national goal is to move towards a 20% reduction
in carbon dioxide emissions below 1990 levels by 2010.

     The EU Emissions Trading Scheme (ETS) for greenhouse gases is the key
component of EU policy to meet its commitments under the Kyoto Protocol. The
mechanisms for implementing the Emission Trading Scheme are currently being
developed in the UK.

     Due to the lack of available information on how emissions caps and
allowances will be distributed across the power generation sector, the AES Drax
business plan currently assumes that the output of AES Drax will not be
restricted. We anticipate that the carbon emissions regulatory environment will
become clearer towards the end of the year as the government concludes its
consultation.

     However, assuming the output of coal-fired power stations is restricted and
assuming the cap allocations are equitable, AES Drax will maintain an advantage
over other plants as it is the most efficient coal-fired plant in the UK.

     In 2002, the UK launched the first phase of its voluntary emissions trading
scheme. The development of this scheme going forward, however, is highly
dependent on developments at EU level. Emission trading schemes both at the
national and at the EU level might adversely affect the financial performance
and operations of the Drax Power Station.

     Energy White Paper

     In February 2003, the UK Government published its Energy White Paper which
sets out a long-term energy strategy for the UK. Although the contents of the
White Paper are highly generalized, it contains a number of broad environmental
proposals that may impact on the business of AES Drax in the UK. These include:

     o    working towards cutting UK carbon dioxide emissions by 60% by 2050;

     o    the ambition to double the share of electricity from renewable
          sources by 2020 from existing 2010 targets of 10%; and

     o    from 2005, electricity generators are expected to participate in an
          EU-wide carbon emissions trading scheme. This will be a central part
          of the UK Government's emissions reduction policy. The UK Government
          hopes that the inclusion of the electricity industry within the scope
          of the EU emissions trading scheme will give a direct incentive to
          electricity generators to reduce emissions.

     Although the White Paper does not set targets for the shares of electricity
supplied from different fuels, it predicts that by 2020 "coal fired generation
will either play a smaller part than today in the energy mix or be linked to CO2
capture and storage (if that proves technically, environmentally and
economically feasible)." The thrust of the White Paper is therefore to require
significant reductions in CO2 emissions from coal-fired power stations. It
states that if coal is to play more than a marginal role in the energy mix
(i.e., coal, gas, nuclear, oil, wind and renewables) beyond around 2015,
generators will need to find economic ways of dealing with the consequential
carbon dioxide emissions.

     The White Paper does, however, state that diversity of supply is the best
way of ensuring the reliable supply of electricity. It acknowledges that coal is
easy to store and transport and can be sourced from a range of stable suppliers.
As loads in coal-fired stations can be varied with relative ease, it is also a
useful way of meeting peak demand or covering for supply intermittencies in
other fuels.


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<PAGE>


     Water

     The UK Government's Water Bill had its second reading in the House of Lords
on March 6, 2003. This Bill aims to promote greater conservation of water
resources and, if enacted, may impact upon the Drax Power Station's ability to
abstract water from the River Ouse and from groundwater. The Water Bill would
amend the abstraction licensing system including introducing time limits for new
abstraction licenses; increasing penalties for abstraction offences and allowing
the Environment Agency to revoke an abstraction license that is causing
significant damage to the environment without paying compensation after 2012.

     The Water Framework Directive, which must be transposed into domestic
legislation by December 2003, required the UK government to establish
comprehensive river management plans and to implement measures necessary to
ensure there is not deterioration in the ecological status of water bodies.

Insurance

     AES Drax has a comprehensive insurance program underwritten by recognized
insurance companies licensed to do business in England and Wales, which has been
reviewed by an independent insurance adviser (the "Adviser").

     AES Drax obtained a waiver from the trustee of the Eurobonds (the "Eurobond
Trustee") (the "Insurance Waiver") to amend the required terms of insurance
coverage on July 1, 2002. AES Drax amended the insurance requirements to reflect
the then obtainable levels of cover and maximum deductible, which was to be
reviewed by the Adviser prior to subsequent renewal dates. If the Adviser
concluded that better cover could be obtained on commercially reasonable terms
then we would be required to put such cover in place (subject to the cover not
being required to be better than the original requirements of the Eurobonds).
The Insurance Waiver remained valid until the expiry of the then-current
insurance cover on November 26, 2002.

     The insurance cover required under the Subsidiary Obligations was not
available on commercially reasonable terms at the time of renewal in respect of,
amongst other things, the maximum combined material damage/business interruption
deductible ((pound)10 million) or the maximum loss cover ((pound)1.3 billion).

     The insurance was due for renewal in November 2002, shortly after the
termination of the Hedging Contract. Because the business interruption loss
methodology agreed for the policy that was in effect prior to that renewal date
was based upon the Hedging Contract being in place, the insurers were unable to
agree a basis on which to provide conventional business interruption insurance.

     Therefore, the Eurobond Trustee agreed that AES Drax would initially renew
the insurance on the basis of material damage cover only and that business
interruption insurance would not be provided for six months from the date of
renewal (being November 27, 2002). It was further agreed that during that 6
month period AES Drax would examine the options for re-introducing business
interruption coverage. This process has not yet commenced.

     The terms of the insurance cover renewed in respect of the period November
27, 2002 to November 26, 2003 is for material damage only, with a (pound)5m
maximum deductible for each and every loss and a $1 billion ((pound)600 million)
maximum loss cover. There is 100% participation in this renewal. The premium is
approximately (pound)5.2 million per annum (plus Insurance Premium Tax), a
reduction of approximately (pound)6 million from the previous annual premium due
in part to the cover not including business interruption.

     The Adviser reviewed the basis for renewal and the bond indenture was
amended as of November 26, 2002 in order to reflect the terms of the new
insurance cover, as the minimum insurance requirements under the bond indenture
were no longer available on commercially reasonable terms. A further waiver was
also obtained from the Eurobond Trustee in respect of the deficiencies in the
terms of the renewed insurance cover under the terms of the Eurobonds.

Property

     The freehold property on which the Drax Power Station is located and the
other freehold land referred to below, collectively referred to as the Property,
is an approximately 1,850 acre site located in North Yorkshire, England on the
banks of the river Ouse between the towns of Selby and Goole. AES Drax is the
legal and beneficial owner of the Property, subject only to completion of the
registration of AES Drax as proprietor at HM Land Registry pursuant to the


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<PAGE>


transfer of the Property on July 8, 1999 by National Power plc to National Power
Drax Limited. The transfer was made with full title guarantee except for certain
small and insignificant areas specified in the Certificate of Title for which
application was made to register at HM Land Registry with absolute or possessor
title. The registration for these areas was completed on May 15, 2002.

     The Drax Power Station has the benefit of 17 atmospheric monitoring
stations, including 11 off-site stations. AES Drax operates the off-site
monitoring stations under short-term leases or pursuant to licenses.

     Parts of the Property are used for various ancillary purposes, including
agriculture and as a social club, golf course and sports facility.

The Electricity Industry in England and Wales

     The information set forth below relating to the electricity market and the
regulatory regime in England and Wales has been derived from publicly available
sources.

General Overview

     The principal sectors of the electricity industry in England and Wales are:

     o    generation: the production of electricity;

     o    transmission: the transfer of electricity across the National Grid,
          the national high voltage transmission system;

     o    distribution: the delivery of electricity from the National Grid
          through low-voltage local distribution networks to customers; and

     o    supply: the supply of electricity by the regional electricity
          companies ("RECs"), or other licensed suppliers to the customer.

     Generation

     The main generators of electricity in England and Wales are Innogy,
PowerGen, London Power Company, British Energy, AEP, Magnox, International Power
plc and AES. Additional power producers, however, have entered the market, and
published sources indicate that there are currently approximately 64 companies
licensed to generate electricity in England and Wales as well as a small number
of companies that produce power for their own use. Although coal-fired power
stations predominate, gas-fired power stations now account for approximately 37%
(2001 : 34%, 2000 : 36%) of electricity generation.

     Transmission

     NGC owns and operates the National Grid in England and Wales. The National
Grid connects power stations to supply points where the RECs and other customers
connected directly to the National Grid receive electricity. The National Grid
is connected to transmission systems in Scotland and France.

     Distribution

     Distribution Network Operators are responsible for the delivery of
electricity over the local distribution networks. There are 12 Distribution
Network Operators in England and Wales.

     Supply

     Each of the 12 RECs supply electricity to the majority of consumers in
England and Wales. However, any licensed supplier may, subject to the terms of
its license, supply electricity to consumers in any area.


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<PAGE>


Regulation under the Electricity Act 1989 and the Utilities Act 2000

     The Electricity Act 1989, which we refer to as the Electricity Act, created
the original framework for the regulation of the electricity industry in the UK.
The framework for reform of regulation of utilities generally in the UK and to
permit the implementation of NETA was established by the Utilities Act 2000,
which we refer to as the Utilities Act 2000, and which became law on July 28,
2000. The Utilities Act 2000 created the Gas and Electricity Markets Authority,
which we refer to as the Authority, a statutory corporation that has the primary
responsibility for regulating the industry. Its principal objective is to:

     "protect the interests of consumers in relation to gas or electricity
     conveyed by distribution systems wherever appropriate by promoting
     effective competition between persons engaged in, or commercial activities
     connected with, the generation, transmission, distribution or supply of
     electricity."

     A license is generally required to generate, transmit, distribute or supply
electricity. These licenses are granted by the Authority which has the
responsibility of enforcing license conditions. The Secretary of State, however,
can create exemptions from the licensing requirements for certain generators and
suppliers.

     The Authority has the power to impose a monetary penalty of such amount as
is reasonable in all the circumstances of the case on any company in breach of
its license conditions and/or which fails to achieve any standard performance.
There are certain collective license modification procedures enabling the
Authority to modify standard license conditions without referring the matter to
the Competition Commission.

     The Utilities Act 2000 introduced separate licensing of electricity supply
and distribution, and a bar on supply and distribution licenses being held by
the same legal person.

     Reform of Utility Regulation under the Utilities Act 2000

     The framework for the reform of the electricity market in England and Wales
is contained in the Utilities Act 2000 which:

     (i) replaced the Director General of Electricity Supply and the Director
General of Gas supply with the Gas and Electricity Markets Authority;

     (ii) established the Gas and Electricity Consumer Council which
investigates complaints of, provides information of assistance to, and
advocates the interests of all consumers;

     (iii) established that the principal objective of the Secretary of State
and the Authority in carrying out their respective functions under the
Electricity Act is to protect the interests of consumers in relation to the
supply of electricity and, wherever appropriate, promote the effective
competition in the principal sectors of the electricity industry in the United
Kingdom;

     (iv) provided the Authority with power to impose a monetary penalty of such
amount as is reasonable in all the circumstances of the case on any company in
breach of its license conditions and/or which fails to achieve any standard
performance;

     (v) required any company which is authorized by a license granted under
the Electricity Act to publish information showing the connection, if any,
between its directors' pay and customer service standards;

     (vi) required the Authority to give reasons for key decisions, publish and
consult on its forward work programmes, and establish a code of practice on its
consultation and decision-making procedures;

     (vii) set out new collective license modification procedures enabling the
Authority to modify standard license conditions without referring the matter to
the Competition Commission; and

     (viii) included a requirement for separate licensing of electricity supply
and distribution, and the introduction of a bar on supply and distribution
licenses being held by the same legal person.


                                      37
<PAGE>


     New Electricity Trading Arrangements (NETA) for England and Wales

     NETA provides an opportunity for suppliers to compete on pricing power.
Generators seek buyers actively for their power and sell at the prices that
those buyers are willing to pay. NETA facilitates bilateral trading between
generators, suppliers and other traders. Under NETA, the Balancing and
Settlement Code incorporates the rules of the balancing mechanism summarized
below. All licensed generators and suppliers are parties to the Balancing and
Settlement Code.

     NETA assumes that the NGC will balance the system. NGC assesses the balance
of the system by requiring participants to give notice of their expected
generation output or demand for each half hour trading period. These
notifications provide the baseline for bids and offers from generators and
suppliers.

     The NETA trading arrangements are illustrated and described below:

                               [GRAPHIC OMITTED]


     o    Forward Markets. These permit electricity contracts to be made in
          advance of physical delivery of the electricity. They operate on a
          voluntary basis and prices are agreed bilaterally between buyers and
          sellers. Trading takes place over a wide range of timescales (ranging
          from several years ahead to on-the-day). The Grid Trade Master
          Agreement ("GTMA"), developed by the Electricity Forward Association
          ("EFA") as a standard document for the trading of power under NETA,
          is currently the predominant form of contract for the purchase of
          power in the short to medium term forwards markets. The GTMA was
          intended as a replacement for the EFA terms and it has features which
          differ materially from the terms upon which IPPs with limited
          recourse financing would normally be expected to trade. Trading in
          the long-term forwards markets is more likely to be on bespoke or
          negotiated terms. Power exchanges facilitate trading in the
          short-term forwards markets. NETA makes generators and suppliers
          responsible for matching their anticipated metered generation output
          and anticipated metered demand.

     o    Balancing Mechanism: The terms of the balancing mechanism and
          imbalance settlement (described below) are set out in the Balancing
          and Settlement Code. The balancing mechanism provides the basis
          whereby NGC, as system operator, can accept offers of electricity
          (generation increases and demand reductions) and bids for electricity
          (generation reductions and demand increases) at very short notice in
          order to balance generation and demand or to manage constraints on
          the system. The balancing mechanism opens one hour before the start of


                                      38
<PAGE>


          each trading period. A party submitting an offer or a bid which
          NGC accepts is paid or pays the offer or bid price for the quantity
          of electricity accepted. Any offer or bid does not relieve the party
          of any bilateral contract that it has concluded in the forwards or
          futures market. NCG enters into contracts with generators for
          ancillary services, such as reserve, frequency control and voltage
          support, needed to maintain system security on the National Grid.

     o    Imbalance and settlement: Parties to the Balancing and Settlement
          Code notify the volumes for any trading period under bilateral
          contracts for the sale and purchase of electricity that they have
          concluded in the forwards and futures markets. The imbalance, for
          each party, between its metered generation or demand and its net
          aggregate contract position, adjusted to take account of accepted
          bids or offers in the balancing mechanism, is determined for each
          trading period and cashed-out at an imbalance price calculated under
          the Balancing and Settlement Code. Generators are paid for
          uncontracted generation and charged for contracted volumes not
          covered by generation. Suppliers are charged for uncontracted supply
          and are paid for contracted volumes not matched by consumption. The
          imbalance price reflects the weighted average cost of accepted bids
          or offers in the balancing mechanism for the relevant trading period.

     The Authority and the UK government are currently working towards extending
NETA to Scotland. The intention is to introduce Great Britain-wide electricity
trading and transmission arrangements (BETTA) by October 2004.

The Competition Act 1998

     The Competition Act 1998 contains EU-style prohibitions of anti-competitive
agreements and the abuse of a dominant position. The prohibitions became
effective on March 1, 2000. The Competition Act 1998 also introduced major new
powers of intervention for the competition authorities and widened the functions
of the Regulator. With some exceptions, the sector regulators are given the same
powers as the Director General of Fair Trading, to be exercised concurrently, to
apply and enforce the Competition Act 1998 in relation to anti-competitive
agreements or abuse of market dominance in their sectors.

     Under the Competition Act 1998, agreements and conduct can be notified for
guidance or decisions on whether they infringe the prohibitions to the Director
General of Fair Trading and the sector regulators, which we refer to
collectively as the Director. Agreements may benefit from individual exemptions
granted by the Director, from block exemptions granted by the Secretary of State
or from "parallel exemptions" (arising from EU exemptions). Agreements which
infringe the Competition Act prohibition are void and unenforceable.

     In addition, the Director has wide-ranging powers to investigate suspected
infringements of the prohibitions, including the power to enter premises and to
require the production and explanation of relevant documents without notice.
Failure to comply with an investigation is a criminal offence.

     Where the Director finds that prohibition has been infringed, then he may
give a direction to bring the infringement to an end and can obtain a court
order to enforce such a direction. He has the power to impose interim measures
directions in urgent cases. The Director can impose financial penalties of up to
a maximum of 10% of UK turnover over a three year period. The Director General
of Fair Trading has issued guidance on the setting of such penalties. In
addition, third parties injured by an infringement of the Competition Act
prohibitions may bring a claim in the courts for damages or injunctive relief.

     The Competition Act 1998 contains special transitional provisions for
utilities which give businesses time to adjust their agreements and arrangements
before becoming subject to the prohibitions. In broad terms, particular utility
agreements, which were or would have been exempt from the Restrictive Trade
Practices Act 1976 (which the Competition Act 1998 has replaced) or qualify
under a transitional order by the Secretary of State benefit from a five year
transitional period from March 1, 2000.

     The sector regulators, including the DGES, continue to exercise functions
concurrently with the Director General of Fair Trading in relation to monopoly
investigations in their sectors under the Fair Trading Act 1973. New
investigative powers were conferred on the Director General of Fair Trading and
the sector regulators by the Competition Act 1988 with effect from April 1, 1999
for the purposes of monopoly investigations under the Fair Trading Act 1973,
including the power to enter business premises without notice and require the
production of relevant documents and explanations of any documents produced.


                                      39
<PAGE>



The Enterprise Act 2002

     The Enterprise Act 2002 (the "Enterprise Act") replaces or amends
legislation relating to the structure and functions of the Office of Fair
Trading (OFT) and its investigations. It is expected that these provisions will
come into force in spring/summer 2003.

     The Enterprise Act establishes the OFT on a statutory basis as a corporate
body. Under the new law, the statutory position of Director General of Fair
Trading is abolished and his functions are transferred to the OFT.

     The Enterprise Act makes provision for a system of market investigations by
the Competition Commission. The purpose of these investigations is to inquire
into markets where it appears that the structure of the market or the conduct of
supplies or customers is harming competition. These market investigation
references will replace the existing Fair Trading Act 1973 monopoly enquires.
The OFT and sector regulators may make market investigation references, the
latter in relation to their designated sectors.

     The Enterprise Act also makes provision for designated consumer bodies to
make `super-complaints', where there are market features that may be harming
consumers to a significant extent.

     The Enterprise Act introduces a criminal offence for individuals who
dishonestly engage in cartel agreements. The new cartel offence will operate
alongside the existing regime that imposes civil sanctions on undertakings that
breach the Competition Act 1998 prohibition on anti-competitive agreements.
Those convicted under the new cartel offence may face imprisonment, fines or
both.

     Finally, the Enterprise Act will amend the Company Directors
Disqualifications Act 1986 by providing the OFT and sector regulators with power
to apply to court for orders disqualifying directors of companies which have
committed a breach of competition law.


                                      40
<PAGE>


Significant Developments During 2002 and Recent Developments

     Credit Rating Downgrades

     During the week of October 7, 2002, AES Drax was given to understand that
Moody's and Standard & Poor's began discussions with TXU Europe Group regarding
its credit ratings. TXU Europe Group was the guarantor under the Hedging
Contract (which has now been terminated) between AES Drax and TXU Europe. The
Hedging Contract historically accounted for approximately 60% of the revenues
generated by AES Drax.

     On October 14, 2002, TXU Europe Group was downgraded by Standard & Poor's
(to B+ from BBB-) and by Moody's (to B3 from Baa3). On the same day, AES Drax
was also downgraded by Standard & Poor's to B, negative outlook, which resulted
in all three rating agencies, including Moody's and Fitch, rating AES Drax's
senior debt, the Eurobonds and the bonds, below investment grade (see discussion
under "Operating and Financial Review--Liquidity and Capital Resources--The Bank
Facility"). The notes were downgraded to C by Standard and Poor's, Ca by Moody's
and CC by Fitch.

     Discussions with TXU Europe and TXU Europe Group on Restructuring of the
     Hedging Contract

     Due to TXU Europe Group's credit ratings downgrades, and the announcement
by The TXU Corporation on October 14, 2002 that it would not inject any
additional capital into TXU Europe Group, AES Drax was requested by TXU Europe
Group and TXU Europe to enter into discussions in relation to the termination of
the Hedging Contract. From October 14, 2002, AES Drax began such discussions
with TXU Europe Group and TXU Europe. However, no agreement was reached.

     Notices under the Hedging Contract

     As a result of TXU Europe Group's credit ratings downgrade and TXU Europe's
failure to make timely payments of (pound)25,536,456 due under the Hedging
Contract on October 14, 2002, AES Drax:

     o    gave notice, as of October 15, 2002, to TXU Europe to deliver a
          letter of credit for the benefit of AES Drax in accordance with the
          terms of the Hedging Contract. Failure to issue the letter of credit
          by November 4, 2002 would permit AES Drax to terminate the Hedging
          Contract, subject to receiving the necessary consents from the Senior
          Lenders.

     o    delivered, as of October 15, 2002, a demand for payment and notified
          TXU Europe that AES Drax had rights to terminate the Hedging Contract
          due to TXU Europe's inability to pay its debts as they fell due as
          evidenced by its failure to make the payment due to AES Drax on
          October 14, 2002. This payment was made on October 17, 2002, as a
          result of which this demand no longer had any effect.

     As a result of AES Drax's credit ratings downgrade, TXU Europe gave notice,
as of October 15, 2002, to AES Drax to deliver a letter of credit for the
benefit of TXU Europe in accordance with the terms of the Hedging Contract.
Failure to issue the letter of credit by November 4, 2002 would permit TXU
Europe to terminate the Hedging Contract subject to rights which AES Drax and
the security trustee, who acts as trustee for all the secured senior creditors
(including the holders of the Eurobonds and the bonds), had under a Direct
Agreement with TXU Europe (the "Direct Agreement") which granted certain cure
and other rights for an additional 90 days following November 4, 2002.

     Discussions with Senior Creditors and Key Suppliers

     As a result of the foregoing events, AES Drax began discussions with the
senior creditors and its key suppliers during the week of October 14, 2002,
regarding appropriate actions that should be taken in view of these events.

     Apart from TXU Europe's request for a letter of credit under the Hedging
Contract, certain of AES Drax's counterparties under power purchase agreements
requested additional credit support pursuant to such contracts triggered by the
ratings downgrades. On October 29, 2002, a number of the Senior Lenders agreed
to backstop up to (pound)4.16 million of letters of credit pursuant to the
existing working capital facility of AES Drax for the purpose of providing


                                      41
<PAGE>


credit support to counterparties purchasing power from the Drax Power Station or
credit support desirable in connection with the Drax Power Station's electricity
arrangements.

     In addition, AES Drax agreed with UK Coal Limited, the primary coal
supplier to the Drax Power Station, certain amendments to the supply
arrangements, including:

     o    Suspension of coal deliveries until the week of November 4, 2002 with
          purchases at a reduced level of 80,000 tons per week for each week
          until November 18, 2002.

     o    Ongoing delivery levels subsequent to November 18, 2002 were then
          agreed providing for delivery of 40,000 tonnes during the week
          commencing November 18, 2002 and 70,000 tonnes per week for the four
          weeks commencing November 25, 2002.

     o    In exchange for modifications on coal delivery, AES Drax paid for
          coal deliveries weekly, with payment in the week following delivery,
          up to the end of December 2002. If any additional coal deliveries had
          been taken from UK Coal Limited above these levels, payment would
          have been on normal monthly terms.

     Discussions with TXU Europe Group on Standstill Arrangement

     On October 21, 2002, TXU Europe Group announced the sale of its UK retail
and generation assets to Powergen, a wholly-owned subsidiary of E.ON AG. The
purchase price for the assets was announced as cash of (pound)1.37 billion and
the assumption of (pound)247 million of securitized receivables. Immediately
following the announcement of the sale, TXU Europe Group met with its major
Power Purchase Agreement counterparties, including AES Drax. At this meeting,
TXU Europe Group proposed that all of these counterparties execute a standstill
arrangement to provide TXU Europe Group additional time to evaluate various
options and renegotiate certain contracts. AES Drax did not agree any
standstill arrangements with TXU Europe Group.

     Notice of Termination under the Hedging Contract by TXU Europe

     As described above, TXU Europe had until November 4, 2002 to issue a letter
of credit before AES Drax would have a right to deliver a notice of termination
of the Hedging Contract. TXU Europe failed to deliver the required letter of
credit on November 4, 2002. On November 5, 2002, AES Drax delivered a notice to
TXU Europe informing TXU Europe of their failure to deliver the required letter
of credit in accordance with the notice delivered on October 15, 2002 and that,
although AES Drax was not delivering a notice of termination, TXU Europe was on
notice that AES Drax had such right and that the failure to exercise such right
immediately was not a waiver of its rights. Termination by AES Drax of the
Hedging Contract required the consent of the Senior Lenders. As a result of the
foregoing events, AES Drax engaged in discussions with the Senior Lenders
regarding the possible termination of the Hedging Contract. Upon any termination
of the Hedging Contract by AES Drax, under the terms of the Hedging Contract,
AES Drax would be entitled to receive a termination sum from TXU Europe of
approximately (pound)270 million, guaranteed by TXU Europe Group.

     AES Drax also had until November 4, 2002 to issue a letter of credit before
TXU Europe would have a right to deliver a notice of termination. When AES Drax
failed to deliver the letter of credit by November 4, 2002, TXU Europe delivered
a notice as required by the Hedging Contract and, pursuant to the Direct
Agreement, that it proposed to terminate the Hedging Contract on February 3,
2003 on the basis that AES Drax did not meet the required credit rating under
the Hedging Contract and AES Drax had failed to deliver the required letter of
credit. Under the Direct Agreement, such termination right was subject to
certain rights (including cure rights) which AES Drax and the security trustee
had under such agreement. These rights could be exercised until February 3,
2003.

     Settlement Discussions with TXU Europe and TXU Europe Group; Termination
     of the Hedging Contract by AES Drax

     As a result of the foregoing events, AES Drax began discussions with TXU
Europe Group regarding settlement of the termination sum due under the Hedging
Contract as well as amounts owing for power consumed by TXU Europe during
October and the first half of November 2002. AES Drax's willingness to continue
these discussions was dependent on receiving by November 14, 2002
(pound)49,323,680 (including VAT) for power purchased in October 2002 under the
Hedging Contract.


                                      42
<PAGE>


     On November 7, 2002 Moody's downgraded our subsidiary's senior debt to Caa1
from Caa2 and the notes from Ca to C. The downgrades were attributed to
developing events with TXU Europe Group and TXU Europe, including the delivery
of the notices described above.

     On November 12, 2002, AES Drax received conditional approval from the
Senior Lenders to terminate the Hedging Contract.

     On November 14, 2002, TXU Europe failed to make the October payment despite
having provided certain assurances that payment would be made on time.

     On November 15, 2002, TXU Europe sought an order from the court to restrain
AES Drax from presenting a petition to the court for its winding up. A hearing
was scheduled to hear the merits for seeking such a restraining order on
November 18, 2002.

     During the weekend of November 16 and 17, 2002, TXU Europe, TXU Europe
Group and AES Drax continued their discussions regarding payment of a
termination sum as well as payment for power consumed in October and November
2002. By the afternoon of Sunday, November 17, 2002, a tentative agreement was
reached pursuant to which TXU Europe would pay AES Drax an aggregate of
(pound)290 million (plus VAT) as a termination sum and for power consumed in
October and for November 2002, with delivery of power through November 22, 2002
and then termination of the Hedging Contract. This tentative agreement was
rejected by the Board of Directors of TXU Europe in the early morning of
November 18, 2002, with TXU Europe significantly reducing the amount it was
prepared to pay by (pound)30 million. This offer was immediately rejected by AES
Drax. Throughout the negotiations, TXU Europe was informed that if agreement
could not be reached, AES Drax would consider exercising its right to terminate
the Hedging Contract.

     Although there were further discussions during the morning of November 18,
2002, and AES Drax made numerous attempts to obtain a written proposal from TXU
Europe stipulating an amount it was prepared to pay as a settlement sum and for
power consumed in October and November 2002, no offer capable of acceptance by
AES Drax was received and no agreement as to settlement was reached. AES Drax
then delivered to TXU Europe a notice of termination of the Hedging Contract in
accordance with the terms of the Hedging Contract. The termination notice made
the following demands (but without prejudice to any other rights or remedies
which AES Drax had) of TXU Europe:

     o    payment of Capacity Damages in the amount of(pound)266,482,876 plus
          VAT;

     o    payment of(pound)49,323,679.86 (including VAT) for power consumed in
          October 2002;

     o    payment of approximately(pound)35,117,729 (including VAT) for power
          consumed from November 1, 2002 to the termination time (4:00 p.m.
          (London time)) on November 18, 2002; and

     o    withdrawal of all calls for power subsequent to the termination time
          to permit AES Drax to begin selling power in the market.

     In addition to the notice of termination delivered to TXU Europe, AES Drax
also delivered a demand for payment to TXU Europe Group, as guarantor under the
Hedging Contract, for payment of all amounts then due under the Hedging
Contract. In accordance with the terms of the guarantee, payment was required to
be made within three business days of delivery of the demand for payment.

     Administration of TXU U.K. Ltd, TXU Europe and TXU Europe Group

     On November 19, 2002, TXU Europe Group filed a petition on behalf of
itself, TXU U.K. Ltd. and TXU Europe, seeking protection from its creditors. On
the same day, the United Kingdom High Court approved the petition, putting the
three companies into administration and appointing administrators for each of
them.

     As a result of TXU Europe Group and TXU Europe entering administration, AES
Drax and TXU Europe agreed not to proceed with the hearing relating to AES
Drax's petition to wind up TXU Europe, since no creditor may present a winding
up petition against an English company which is in administration.


                                      43
<PAGE>


     See "Financial Information--Legal Proceedings" for a brief summary of
current developments relating to the TXU administration.

     Consequences of Termination of the Hedging Contract

     The termination of the Hedging Contract, absent ratings affirmations,
constituted an immediate default under the notes. Although the noteholders had
the right to accelerate payment of the notes immediately, pursuant to
intercreditor arrangements the noteholders would not be able to exercise any
enforcement rights, at that time, until 179 days following delivery of certain
required notices under the intercreditor agreements. No such notices have been
delivered to date.

     Distributions on the Notes

     Certain of the forward-looking debt service cover ratios at June 30, 2002,
were below the threshold required to permit distributions of 1.25:1, at 1.19:1.
As a result, our subsidiaries were not permitted to make distributions to us to
fund interest due on the notes on August 30, 2002. This information was provided
to the Rating Agencies and on August 20 and 21, 2002, Fitch and Moody's
respectively, downgraded the senior debt (to `BB' and `Ba2' respectively) and
the notes (to `C' and `Caa2' respectively). S&P also downgraded the notes (to
`CCC') on August 20, 2002. AES, however, made a contribution to us which
together with amounts then held in the notes' debt service reserve accounts was
sufficient to make the payments then due. At the time AES stated that there were
no assurances that it would agree to make any similar payments in the future. It
was also disclosed at the time the June 30, 2002 calculations were made that any
improvement in the forward-looking ratios would depend on a favorable change in
the forward curve for electricity prices during the period from June 30 to
December 31, 2002. Such improvements did not occur and due to the developments
described above, the ratios were expected to be below 1.19:1 at December 30,
2002.

     As a result of the foregoing as well as the Standstill Arrangements
entered into by AES Drax Holdings with the senior creditors, our subsidiaries
were not permitted to make any direct or indirect distributions to us on
December 31, 2002, to enable us to make required payments to the noteholders at
the end of February 2003. Moreover, there were insufficient funds in the notes'
debt service reserve accounts to cover such payments. As of February 2003, the
notes' debt service reserve accounts were funded at $22,142.02 and
(pound)40,643.91, resulting in a significant shortfall and, we did not make the
full interest payments due on the notes on February 28, 2003. Such payment
failure constituted an event of default under the notes subject to a 15-day
grace period, although pursuant to intercreditor arrangements the noteholders
cannot exercise any enforcements rights until 90 days following delivery of
certain required notices under the intercreditor arrangements. On May 16, 2003,
we received an acceleration notice from the Holder of our Notes, declaring the
notes to be immediately due and payable.

     Agreement in Principle on Standstill Agreement with Senior Creditors

     On November 27, 2002, AES Drax Holdings reached an agreement in principle
regarding certain Standstill Arrangements with the steering committee
representing the Senior Lenders and an ad hoc committee formed by holders of the
bonds. The purpose of the Standstill Arrangements was to provide AES Drax and
such senior creditors with a period of stability during which discussions
regarding a consensual restructuring of the project could take place. The
standstill period expires on May 31, 2003, unless extended.

     Standstill Agreement signed with Senior Creditors

     On December 12, 2002, AES Drax Holdings entered into the Standstill
Agreement with, among other parties, the Senior Lenders, certain bondholders
representing a majority in sterling equivalent principal amount of such bonds
(the "Consenting Bondholders"), and the bond trustee.

     The standstill period expires on the Standstill Termination Date, which may
be extended. The Senior Lenders and the Consenting Bondholders have agreed to
waive certain defaults and events of default under the Eurobonds or the bonds,
as applicable, not to accelerate payment of the obligations and not to seek to
enforce security until the Standstill Termination Date. In addition, the parties
to the Standstill Agreement agreed to certain amendments and waivers to the
respective financing documents, which, amongst other things, permits AES Drax to
have access to at least (pound)30,000,000 of funds previously unavailable under
the financing documentation, which funds may be used to provide credit support
to electricity counterparties and suppliers and for working capital needs.


                                      44
<PAGE>


     The consents and waivers provided under the Standstill Agreement enabled
AES Drax Holdings to pay a portion of the coupon on the Eurobonds (equal to the
interest due from InPower Limited to the Senior Lenders under the Bank Facility)
and the interest due to bondholders, in each case on December 31, 2002. As part
of the Standstill Agreement, AES Drax agreed to provide the Senior Lenders and
Consenting Bondholders with a restructuring plan by the middle of March 2003
(the "Restructuring Plan").

     A copy of the Standstill Agreement was attached as an exhibit to the Form
6-K filed by AES Drax Holdings with the SEC on December 13, 2002.

     Neither we nor any noteholders are a party to the Standstill Agreement and
are not involved in the discussions regarding the Restructuring Plan.

     Restructuring Plan

     In accordance with the obligations under the Standstill Agreement, AES Drax
Holdings, on March 14, 2003, presented proposals for a Restructuring Plan and an
updated business plan to the steering committee representing the Senior Lenders
and the members of the ad hoc committee formed by holders of AES Drax Holdings'
bonds (the "Committees").

     AES Drax Holdings attached to its Form 6-K, filed with the SEC on April 11,
2003, three sections of the Restructuring Plan (Executive Summary (Section 1),
Restructuring Proposal (Section 2), and Summary Cash Flows (Section 3)) as
proposed by it on March 14, 2003 as well as the "Important Notice" attached
thereto.

     The Restructuring Plan was delivered by AES Drax Holdings to the Committees
for the purposes of evaluating the proposed financial restructuring of AES
Drax's senior debt and is therefore subject to ongoing discussions with the
Committees. AES Drax Holdings is under no obligation to publicly update or
revise the Restructuring Plan, or any parts thereof, whether as a result of the
outcome of these discussions, new information or any other reason.

     Trading

     See "Information on the Company--Business Overview--Business
Strategy--Trading Strategy."

     Maintenance

     A waiver was obtained from the Eurobond Trustee for an adjustment to the
maintenance regime. As part of our ongoing operational program at Drax we have
decided to move to a "4 year and 8 year" regime following consultation with
Stone & Webster and insurers. This change does not mean that less time is spent
on maintenance but that the cycle is different. Stone & Webster confirmed that
they had no objections to increasing the periods between the maintenance
outages, which were previously done on a "3 year and 6 year" regime.

     We note that Stone & Webster pointed out that the change to a "4 and 8
year" maintenance regime may result in the annual overhaul costs at Drax
fluctuating rather than being roughly constant under a "3 and 6 year" regime.
See "Information on the Company--Business Overview--Operation and Maintenance
History--Planned Maintenance."

     Foreign Currency Swaps

     AES Drax Energy is required under the indenture in relation to the notes
to have in place currency hedging agreements in respect of scheduled interest
and principal payments in respect of the dollar denominated notes in a
principal amount equal to the excess of the aggregate amount of outstanding
dollar denominated notes over $160 million. AES Drax Energy (or AES Corp. on
its behalf) has previously entered into such currency hedging agreements in
respect of the interest payments in respect of the dollar denominated notes the
last of which expired on February 28 2003.

     AES Drax Energy has not entered into any replacement currency hedging
agreements as required by the terms of the indenture and does not currently
anticipate entering into any such replacement agreements. It is AES Drax
Energy's view that following the downgrading of the notes as a result of the
termination of the Hedging Contract and the impact of such termination on the
cash flow available to AES Drax Energy, it would not be possible to find a
counterparty to any such currency hedging agreement. In addition, AES Drax
Energy has insufficient cash flow or reserves to be able to enter into a swap
mechanism whereby it would pay a counterparty sterling in exchange for dollars
as it has no funds available to meet such financial obligations.

     The failure to comply with this requirement of the indenture is a Default
under the indenture which will become an Event of Default in the event that
such non-compliance continues for a period of 45 days after notice of such
non-compliance has been given to AES Drax Energy by the trustee for the
noteholders or by the holders of at least 25% in aggregate of the Sterling
Equivalent of the principal amount of the notes then outstanding.


                                      45
<PAGE>


Item 5.  Operating and Financial Review and Prospects

AES Drax Energy Limited

     Given that we are a holding company with no operations of our own, the
following discussion relates to the operating results of AES Drax, the owner of
the Drax Power Station. AES Drax will provide distributions, group relief
payments and/or intercompany loans to our indirect subsidiary, AESD, to pay
principal, premium, if any, and interest on our debt obligations.

General

     The following discussion contains forward-looking statements regarding AES
Drax and its operations. These statements are based on the current plans and
expectations of AES Drax and involve risks and uncertainties that could cause
actual future activities and results of operations to be materially different
from those set forth in the forward-looking statement. Important factors that
could cause actual results to differ include risks set forth in "Key
Information--Risk Factors."

     The economics of any electric power facility are primarily a function of
the price of electricity, the quantity of electricity which is produced and sold
and the level of operating expenses incurred. Generally, the greater the
percentage of time a unit is operating, the greater the revenues associated with
that unit.

     During 2000 AES Drax's business activities concentrated on selling
electricity generated by the Drax Power Station into the Pool. The Pool remained
in place until March 27, 2001 when NETA was implemented. See "Information on the
Company--Business Overview--Changes to the Electricity Market in England and
Wales." The market for wholesale electric energy and energy services has now
been largely deregulated as a result of implementation of NETA compared with the
prior Pool arrangements. In a competitive market where operation is based on
bids made by owners of generating assets in the region, AES Drax expects that
owners of lower marginal cost facilities will bid lower prices, and therefore
these facilities will be in operation more often than higher marginal cost
facilities.

     The Drax Power Station is capable of operating at high availability due to
the high quality of its design and construction under the direction of the CEGB.
Despite the fire involving Unit 3 on December 27, 1999 and the rotor winding
fault reported on Unit 2 in the quarter ended September 30, 2000 weighted
average (based on capacity) availability for 2000 was approximately 82.5%. For
the year ended December 31, 2001, the station had a weighted average (based on
capacity) equivalent availability factor of 85.8%. For the year ended December
31, 2002, the station had a weighted average (based on capacity) equivalent
availability factor of 81.90%. This reduction in availability compared to 2001
was due primarily to the increased levels of two-shifting caused by the manner
in which TXU Europe called power under the Hedging Contract prior to its
termination and the increased levels of forced outages which resulted from this
regime. As we have moved back into baseload operation through the first quarter
of 2003, both the plant availability and forced outage rates have improved. For
the three months ended March 31, 2003, the Drax Power Station's weighted average
(based on capacity) equivalent availability factor was 91.10% and its forced
outage rate was 2.2%, compared to 88.70% and 11.26%, respectively, for the three
months ended March 31, 2002.

     Termination of the Hedging Contract

     The Hedging Contract was terminated on November 18, 2002 following the
failure by TXU Europe to pay for the power supplied by AES Drax to TXU Europe in
respect of the month of October and part of the month of November (up to the
date of termination) and TXU Europe's failure to provide a letter of credit as
required by the terms of the Hedging Contract. The termination of the Hedging
Contract has had a significant impact upon the results of AES Drax for the year
ended December 31, 2002 and will affect the future results of the Drax Power
Station as it migrates to becoming a fully-merchant plant. In the financial
statements to December 31, 2002 we have recorded a provision of (pound)136.8
million and a contingency in respect of the potential "Capacity Damages" payable
under the termination of the contract of approximately (pound)266 million.

     The (pound)136.8 million provision consists of four distinct elements:


                                      46
<PAGE>


     o    The revenues from TXU Europe under the Hedging Contract consisted of
          two components, a capacity fee (which was essentially fixed) and a
          variable call payment, which was based upon the volumes of power sold
          by AES Drax to TXU Europe. Under the Hedging Contract, the cash flows
          received in respect of the capacity fees were shaped, so that the
          payments were higher through the first and fourth quarter of each
          calendar year. However, the accounting policy that we adopted was to
          smooth the receipt of the capacity fees and treat them as a fixed
          amount received each month. In 2002, the capacity fees payable were
          approximately (pound)18.8 million pounds per month.

          However, as at the date of termination, AES Drax's balance sheet
          included an amount of accrued income in respect of the TXU Europe
          capacity fees, as the cash receipts in the period to November 18,
          2002 were approximately (pound)55.6 million less than the revenues
          reflected on the income statement. Therefore, AES Drax created a
          provision for this accrued income during the quarter ended December
          31, 2002. The change between this figure and the (pound)70.9 million
          originally estimated in the September 30, 2002 6-K filing is due to
          an adjustment to take account of the movement in this accrual between
          September 30, 2002 and the date of termination of the Hedging
          Contract.

     o    Prior to the commencement of the Hedging Contract in April 2000, AES
          Drax paid TXU Europe a (pound)10 million fee pursuant to the Hedging
          Contract in connection with the structuring of the transactions
          contemplated by the Agreement:

          The accounting treatment was to amortize this fee over the life of
          the Hedging Contract, a period of approximately 15 years. As at the
          date of termination of the Hedging Contract, a balance of (pound)8.3
          million remained. Therefore, due to the termination of the Hedging
          Contract we wrote-off this balance during the quarter ended December
          31, 2002.

     o    In addition, AES Drax paid (pound)1.2 million of professional fees
          relating to the renegotiating of the Hedging Contract due to the
          introduction of NETA and its conversion to the new trading
          regulations. The accounting treatment adopted was to amortize these
          costs over the remaining life of the Hedging Contract, a period of
          approximately 13 years. As at the date of termination, a balance of
          (pound)1.1 million remained. Therefore, due to the termination of the
          Hedging Contract, we wrote-off this balance during the quarter ended
          December 31, 2002.

     o    A provision in respect of the power sold to TXU Europe under the
          Hedging Contract during October and in the period to November 18,
          2002, when the contract was terminated. TXU Europe have not paid us
          for this power and a provision of approximately (pound)71.8 million
          (excluding VAT) was made during the quarter ended December 31, 2002.

Critical Accounting Policies

     We prepare our financial statements in accordance with accounting
principles generally accepted in the UK. As such, we are required to make
certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. The significant accounting policies which we believe are most
critical to understanding and evaluating our reported financial results include
revenue recognition, impairment of long-lived assets, deferred finance costs and
derivatives.

     AES Drax's critical accounting policies are:

     o    Revenue recognition

          Revenues from the sale of electricity are recorded based upon output
          delivered and capacity provided at rates specified under contract
          terms or prevailing market rates.

     o    Goodwill Impairment of long-lived assets

          We evaluate the impairment of our long-lived assets based on analysis
          performed under UK GAAP. Under UK GAAP, goodwill arising on the
          acquisition of subsidiaries represents the excess of the fair value
          of the consideration given over the fair




                                      47
<PAGE>


          value of the identifiable net assets acquired. Goodwill is
          capitalized and amortized over 20 years. Under US GAAP, the
          Acquisition has been treated as an acquisition of assets and
          accordingly the entire purchase price, including certain liabilities
          assumed, has been allocated to tangible fixed assets and depreciated
          over the estimated useful lives of the assets, being thirty five
          years. Under UK GAAP, we have recorded an impairment loss measured by
          reference to the value in use of the assets. Under US GAAP, an
          impairment loss on the tangible fixed assets is recorded only if the
          assets are not recoverable from their undiscounted cash flows. No
          impairment had been recognized under US GAAP.

          Given the ongoing nature of the Standstill Arrangements and that no
          conclusion has been reached upon a restructuring proposal, it is not
          appropriate to treat the assets owned by AES Drax Holdings as held
          for sale. This uncertainty will only be resolved following the
          completion of the discussions with AES Drax's senior creditors, or
          absent a restructuring of our indebtedness, the potential enforcement
          of security arrangements under intercreditor arrangements if certain
          conditions are satisfied. Therefore, under US GAAP, no impairment is
          disclosed in the financial statements of AES Drax Holdings or our
          other subsidiaries for the year ended December 31, 2002. See the
          reconciliation between UK and US GAAP, contained in note 29 to our
          financial statements included in this annual report.

          Under US GAAP, Financial Accounting Standard ("FAS") No. 144 states
          that a long-lived asset classified as held for sale is held on the
          balance sheet at the lower of its carrying amount or fair value. As a
          result, our ultimate parent company, AES recorded an after-tax
          impairment loss of approximately $893 million in the fourth quarter
          of 2002 relating to AES Drax and AES Drax was classified as held for
          sale in AES's consolidated balance sheet.

     o    Deferred finance costs

          Financing costs are deferred and amortized over the related financing
          period using the effective interest method of amortization. Deferred
          financing costs are shown net of accumulated amortization of
          (pound)16.8 million and (pound)10.8 million as of December 31, 2002
          and December 31, 2001, respectively.

     o    Derivatives

          The group enters into various derivative transactions in order to
          hedge its exposure to certain market risks. AES Drax Holdings and
          certain of its subsidiaries currently have outstanding interest rate
          swap, cap and floor agreements that hedge against interest rate
          exposure on floating rate debt. Interest swaps, caps and floors are
          accounted for by adjusting the interest rate cost on the floating
          rate debt.

Results of Operations

     AES Drax's results of operations through the majority of the period covered
by this report relied on payments made to it by TXU Europe under the Hedging
Contract, on revenues from the sale of electric energy, capacity and other
related products, its ability to successfully operate under NETA, its trading
strategy and on the level of its operating expenses.

     As a result of termination of the Hedging Contract, the following results
are not necessarily indicative of results we expect to achieve in future
periods, as AES Drax only began operating as a fully merchant plant as of
November 19, 2002.

     The financial statements for the AES Drax companies are prepared in
accordance with UK GAAP, which differs in certain significant respects from US
GAAP. For a discussion of these differences and a reconciliation between UK and
US GAAP, see note 29 to our financial statements included in this annual report.

     Year ended December 31, 2002 compared to the year ended December 31, 2001

     Revenues for the quarter ended December 31, 2002 totaled (pound)137.7
million (2001: (pound)143.5 million) and for the year ended December 31, 2002
totaled (pound)524.8 million (2001: (pound)586.1 million). The 4% decrease in
revenues for the fourth


                                      48
<PAGE>


quarter of 2002, compared to the same period in 2001 is due principally to the
termination of the Hedging Contract in mid-November (see "Information on the
Company-Significant Developments During 2002 and Recent Developments") at which
time AES Drax stopped selling power to TXU Europe and began selling electricity
into the market. The revenues for the fourth quarter of 2002 include
approximately (pound)71.8 million of revenues for which AES Drax has not
received payment from TXU Europe and for which we have established an
offsetting provision as described below. As AES Drax only began to shift to a
pure merchant plant at this time and AES Drax was in negotiations with certain
of its senior creditors regarding standstill arrangements and a new trading
strategy and electricity contracting policy, these developments as well as
arrangements with counterparties regarding credit enhancement also impacted AES
Drax's ability to capture certain merchant sales. Sales in the fourth quarter
of 2002 totaled 5,642.2 GWh (2001: 4,919.3). This increase in volume is due to
the impact of TXU Europe making increased calls for power under the Hedging
Contract in the six weeks prior to termination and the successful transition to
a fully merchant business, in the six weeks post-termination of the Hedging
Contract. The decrease in revenues is due to the loss of the capacity payment
payable by TXU Europe under the Hedging Contract, which would have contributed
a further (pound)18.8 million of revenues in December 2002 and the overall
decline in capture price from an average of (pound)29.16/MWh to
(pound)24.40/MWh for the quarter ended December 31, 2002. Most of this decline
is due to the transition from the Hedging Contract, which had accounted for
approximately 60% of the revenues generated by the Drax Power Station and was
terminated on November 18, 2002, to becoming a fully merchant plant, where AES
Drax was capturing only market prices averaging around (pound)16.92/MWh during
the last part of the year.

     The 10.4% decrease in revenues for the year ended December 31, 2002
compared with the previous year, are once again primarily due to the reduction
in prices over the last twelve months and a 12.6% decrease in generation from
21,314GWh in 2001 to 18,627GWh. This decrease primarily reflects both the impact
of increased competition and over-capacity within the UK generation market.
During the period the Hedging Contract was in place, it also reflects the
increased proportion of our sales which were made under the Hedging Contract
prior to termination, increasing the average capture price from (pound)27.50/MWh
to (pound)28.18/MWh, an increase of 2.5% over 2001 which indicates the benefit
the Hedging Contract had provided AES Drax as market prices declined.

     Prices throughout 2002 for Annual Baseload Contracts have fallen from
around (pound)18.45/MWh in December 2001 to (pound)16.92/MWh, by December 31,
2002. The following graph shows the trend in such baseload prices over the year
ended December 31, 2002:

                            Annual Baseload Prices

                               [GRAPHIC OMITTED]

     During the first quarter of 2003, prices increased sharply through January
when we successfully hedged some of our output. We believe that this price peak
was caused by uncertainty in the market place following the administration of
the TXU Europe group and the issues faced by British Energy at that time. The
table above also shows the trend in baseload prices since January 1, 2003.


                                      49
<PAGE>


     Cost of sales for the quarter ended December 31, 2002, which are primarily
fuel costs were (pound)69.6 million, compared to (pound)59.1 million for the
quarter ended December 31, 2001. Cost of sales for the year ended December 31,
2002 were (pound)219.5 million, compared to (pound)267.2 million for the year
ended December 31, 2001. The increase in fuel burnt for the fourth quarter of
2002, compared to the same period in 2001, is due to the increase in generation
from 5,142.5GWh to 5,889.5GWh, which reflects the increased volume of
electricity sales in the quarter. However, the year ended December 31, 2002
shows a 17.9% reduction in fuel costs, reflecting the 12.6% reduction in
generation for 2002 compared to 2001 and a reduction in our fuel costs resulting
from the change from the Innogy coal contract, to the one with UK Coal Limited,
which occurred during 2001.

     The cost of fuel remained in line with expectations due to the transition
to supply contracts with all our major coal suppliers. However, during the last
quarter of 2002, in response to the developments relating to the termination of
the Hedging Contract, the payment terms for UK Coal Limited were temporarily
revised as AES Drax paid them weekly in arrears. This arrangement was partially
off-set by a discount of GBP LIBOR plus 3% for the earlier payment.

     Gross profit (revenues less cost of goods sold) was (pound)68.1 million for
the quarter ended December 31, 2002 (2001: (pound)84.4 million). This gives a
gross margin for the fourth quarter of 2002 and the twelve months of
approximately 49.4% (2001: 58.8%) and 58.2% (2001: 54.4%) respectively. The
change in the gross margin during the fourth quarter can be explained by the
termination of the Hedging Contract and the transition to a fully merchant
plant, with the previously highlighted 16% decrease in our average capture
price. The improvement in the gross margin for the year ended December 31, 2002
is mostly due to a slight improvement in the average selling price (an increase
of 2.5%), an increase in the proportion of electricity that was sold to TXU
Europe under the Hedging Contract for the period ended November 18, 2002, and
the reduced fuel costs of approximately (pound)0.70/MWh from contracts with AES
Drax's major suppliers. The increase in the average selling price was solely due
to the terms of the Hedging Contract and we do not expect that AES Drax will be
able to capture such selling prices in the future absent significant changes in
the market.

     Administrative expenses for the quarter ended December 31, 2002 totaled
(pound)762.6 million (2001: (pound)54.1 million) and for the year ended 31
December, 2002 totaled (pound)894.8 million (2001: (pound)176.2 million). These
totals for 2002 include an exceptional item relating to the termination of the
Hedging Contract and an impairment of fixed assets, as a result of the
termination of the Hedging Contract. The component parts of this exceptional
item can be summarized as follows:

          TXU-related write-offs and provision       (pound)136.8 million
          Impairment of fixed assets                 (pound)579.0 million

          Total                                      (pound)715.8 million

     A break-down and explanation of the (pound)136.8 million has been provided
above (see "--Results of Operations"), although the constituent parts are
summarized below:

          Write-off of accrued income                (pound)55.6 million
          Write-off of structuring fee               (pound)8.3 million
          Write-off of professional fees             (pound)1.1 million
          Provision for power sold, but not paid for (pound)71.8 million

          Total                                      (pound)136.8 million

     The impairment of fixed assets is in line with the requirements of FRS 11 -
The Impairment of Fixed Assets and Goodwill, under UK GAAP. This standard tries
to ensure that fixed assets and goodwill are recorded at no more than their
recoverable amount. It considers how financial statements should treat any
impairment loss which becomes apparent and tries to ensure that sufficient
disclosure is given to enable users of financial statements to understand the
impact of impairment.

     In our case, we have compared the book value of our fixed assets (both
tangible and intangible) totaling approximately (pound)1,297 million against the
net present value (NPV) of the estimated future discounted cash flows of the
business. The discount rate used has been reviewed for reasonableness, and we
are satisfied that a post-tax discount rate of 7.9% is appropriate. The cash
flows used for this exercise were sourced from AES Drax's Restructuring Plan
(see "Information on the Company-Significant Developments During 2002 and Recent
Developments"). The result of this




                                      50
<PAGE>


"impairment test" is that the book value of the fixed assets exceeds the NPV of
the cash flows by approximately (pound)579 million. Therefore, we are required
to record a write-off against our fixed assets of this amount, which is charged
initially against our Intangible Assets, which comprise of the goodwill that
arose upon acquisition of Drax Power Station by AES (see Notes 4 and 8 to the
financial statements included in this annual report) and subsequently against
the company's Tangible Assets.

     This write-off reduces the Intangible Assets from a book value of
(pound)549.5 million to (pound)Nil, and the Tangible Assets from (pound)1,112.6
million to (pound)1,083.1 million.

     The "normal" administrative expenses consist primarily of fixed operations,
maintenance and other variable costs and the expenditure was broadly in line
with our expectations. The expenses for the quarter ended December 31, 2002
totaled (pound)46.8 million (2001: (pound)54.1 million) and for the year ended
December 31, 2002 totaled (pound)179.0 million (2001: (pound)176.2 million). The
decreased level of expenditure in the fourth quarter of 2002 was due to the
following:

     o    An increase in the "Balancing System Use of System" charges or BSUoS,
          which have been discussed in previous periodic reports on Form 6-K we
          have filed with the SEC, covering the NGC costs of balancing the
          system under NETA. For the last quarter of 2002, these totaled
          (pound)1.1m of additional costs over 2001, due to the increased
          volume of generation in this quarter, over the same period in 2001.

     o    The increased level of professional and legal fees incurred in the
          quarter associated with the attempted restructuring of the Hedging
          Contract and then the subsequent preparation and implementation of a
          Standstill Agreement with our senior creditors. Such fees totaled
          (pound)5.6 million for the quarter ended December 31, 2002.

     o    The increase in our insurance premiums following renewal in November
          2001, when our premiums increased from approximately (pound)3.7
          million per annum to (pound)7.5 million per annum. This significant
          increase in the premiums payable was due to:

          o    The impact of September 11th on the insurance market as a whole.

          o    The withdrawal of certain insurers from the power sector.

          o    Insufficient capacity available in the insurance market at the
               time of renewal.

          o    AES Drax's claims history during the first year of the policy.

     This added approximately (pound)1 million to our insurance expense for the
quarter ended December 31, 2002 compared to the same period in 2001.

     o    The above increases were off-set by the following:

          o    In 2001, we had a(pound)3.3 million write-off in respect of
               Enron

          o    AES Drax achieved a reduction in our rates expense for 2002,
               resulting from previous unplanned outages at the plant, which
               totaled approximately (pound)1.6 million

          o    AES Drax made savings on maintenance expenditure, compared to
               2001, of approximately (pound)1.9 million primarily due to the
               deferral of the Unit 2 major outage and the reduced levels of
               generation.

     This explains the (pound)0.7 million increase in administrative expenses
for this quarter compared to the same period in the previous year.

     o    Other reductions and savings in administrative expenses generated a
          further reduction against 2001 of (pound)7.3 million, which includes
          (pound)3.9 million of foreign exchange gains on AES Drax Energy's
          dollar denominated notes, compared to an exchange loss of (pound)1.7
          million in the fourth quarter of 2001.

     The additional (pound)2.8 million of administrative expenses for the year
ended December 31, 2002 compared to 2001, can be attributed to the following
factors:


                                      51
<PAGE>


     o    The increase in AES Drax's insurance premiums following renewal in
          November 2001, when AES Drax's premiums increased from approximately
          (pound)3.7 million per annum to (pound)7.5 million per annum. This
          significant increase in the premiums payable was due to the reasons
          noted above. This added approximately (pound)5.9 million to AES
          Drax's insurance expense for the year ended December 31, 2002
          compared to the same period in 2001 and insurance totaled (pound)10.9
          million for the year.

     o    The amortization of an acquisition adjustment for the fuel contract
          with Innogy plc was completed when the contract expired in September
          2001. This adjustment had a beneficial effect on our amortization
          expense during the first half of 2001; so as this is no longer
          available, this has increased our amortization expense for the year
          ended December 31, 2002 by (pound)17.2 million.

     o    The significant amount of expenditure on professional and legal fees
          in 2002, which totaled(pound)7.8 million compared to(pound)1.8
          million in 2001.

     o    Our total Use of System charges also increased in 2002, from
          approximately (pound)31 million per annum in 2001 to (pound)34
          million in 2002, which reflects the fact that NETA was only
          introduced at the end of March 2001 and 2002 will include a full year
          of charges.

     The above increases were also off-set by reductions in other areas:

     o    The Enron write-off that occurred in 2001 of(pound)3.3 million.

     o    The deferral of the major outage on Unit 2, which reduced expenditure
          by (pound)5.5 million and other savings on maintenance that totaled
          (pound)5.1 million. Expenditure has been deferred as a result of
          lower generation levels and through our own cost-cutting initiatives.
          Our commitments under the Hedging Contract prior to its termination
          and the running regime of the plant, has meant that it has been
          difficult to release plant (bring it out of service) as often as
          maintenance routines would dictate. Therefore some maintenance
          expenditure has been deferred and rescheduled until such time as the
          plant can be released.

     o    Salaries are approximately (pound)1 million lower than the same
          period in 2001, with reduced staffing levels and encouraging people
          to transfer onto contracts where their overtime is built into their
          basic salary.

     o    We achieved a reduction in our rates expense for 2002, resulting from
          previous unplanned outages at the plant, which totaled approximately
          (pound)2.1 million for the year.

     o    Other reductions and savings in administrative expenses generated a
          further reduction against 2001 of (pound)12.3 million, which includes
          (pound)11.1 million of foreign exchange gains on AES Drax Energy's
          dollar denominated notes.

     Interest receivable and other income was (pound)5.7 million for the fourth
quarter of 2002, and totaled (pound)23.8 million for the year ended December 31,
2002. The charges for the fourth quarter in 2001 were (pound)3.6 million, and
(pound)16.2 million for the year 2001, representing an increase of approximately
58% for the fourth quarter and a 47% increase for the year 2002. This income
represents not only the interest accrued on the various bank balances held by
AES Drax, but also reflects the benefits accrued from the Harich Swap. The
increase in AES Drax's interest income for the fourth quarter of 2002, compared
to the same period in 2001, is due to an increase in the Harich Swap income
resulting from the deferral of a (pound)30.8m coupon payment due on the
Eurobonds (being equivalent to the principal payment due under the Bank
Facility) which was agreed to be deferred as part of the Standstill Agreement.
The 47% increase in interest income for 2002 compared to 2001, is again
attributable to an increase in the Harich Swap income resulting from the
deferral of the (pound)30.8m coupon payment, plus the additional benefit that
accrued under the Harich Swap in 2002 due to the lower interest rates. GBP
6-month LIBOR has decreased from 5.9% in January 2001 to 4.3% in December 2002.

     Interest payable and similar charges were (pound)50.6 million for the
fourth quarter of 2002, and totaled (pound)206.4 million for the year ended
December 31, 2002. The charges for the fourth quarter in 2001 were (pound)51.3
million, and (pound)197.6 million for the year 2001, representing a decrease of
approximately 1.4% and an increase of 4.4% respectively, in 2002. The interest
expense comprises three major components:


                                      52
<PAGE>


     (i)   The bank debt, which has a principal under UK GAAP of (pound)1.37
           billion as at December 31, 2002, accruing interest at 8.9% per annum.
           This principal is calculated by deducting the proceeds of the
           issuance of the bonds from the value of the Eurobonds issued at
           financial close ((pound)1.725 billion).

     (ii)  The bonds, which have a principal of(pound)400 million, of which half
           accrues interest at 10.41% and the other half at 9.07%.

     (iii) The notes, which have a principal of(pound)262.3 million, of
           which(pound)135 million accrues interest at 11.25% and the balance at
           11.5%.

     The additional interest expense charged in addition to the above, reflects
the impact of the various interest rate and foreign currency swaps that AES Drax
has in place, plus the costs of the letter of credit used to fund the debt
service reserve accounts with a minimum balance, which we refer to as the
Required Balance, required pursuant to the terms of the Eurobonds. The interest
rate swaps are currently increasing our interest expense as interest rates (GBP
6 month LIBOR) have continued to decline to a low of 3.9900% as at December 31,
2002 (2001: 4.32875%).

     The level of interest expense reflects the significant borrowings we made
to finance the acquisition of the Drax Power Station. Our interest expense has
decreased by approximately (pound)0.7 million for the fourth quarter of 2002
compared to 2001 due to the impact of an additional interest accrual that was
booked in the quarter ended December 31, 2001 to ensure that the 2001 interest
expense was correct. The average rate of interest applicable to our financial
obligations is approximately 9.3% (2001: 9.3%) on our Sterling obligations and
11% (2001: 11%) on our US dollar obligations (see Note 17 to the Financial
Statements).

     The December 2002 interest payment on both the Bank Facility and the bonds
was made on schedule when AES Drax remitted approximately (pound)28.1 million to
InPower Limited for payment of interest to the Senior Lenders and (pound)9
million and $16 million to the bondholders. However, AES Drax did not pay the
portion of the Eurobond coupon corresponding to the principal due on the bank
debt that was due on December 31, 2002 which totaled (pound)30.8 million. This
deferral of the payment of principal was agreed as part of the Standstill
Arrangements. In addition, we were unable to make the interest payments due on
the notes on February 28, 2003. See "Information on the Company-Significant
Developments During 2002 and Recent Developments".

     Due to the impact of the exceptional administrative expenses during the
quarter ended December 31, 2002 we incurred a loss on ordinary activities before
taxation of (pound)739.4 million (2001: Loss of (pound)17.4 million). The loss
on ordinary activities before taxation for the year ended December 31, 2002 was
approximately (pound)772.0 million (2001: Loss of (pound)38.7 million) on which
we received a corporation tax credit of (pound)0.5 million (2001: Charge of
(pound)10.9 million). This equates to an effective tax rate of 0.06% (2001:
28%), even though UK corporation tax rate is currently 30%. The reason for the
credit in 2002 is primarily due to the impact of the exceptional administrative
expenses, which have resulted in zero taxable profits for 2002 and the
(pound)0.5 million credit represents the movement in the deferred tax provision
for the year.

     Year ended December 31, 2001 compared to the year ended December 31, 2000

     Revenues for the quarter ended December 31, 2001 totaled (pound)143.5
million (2000: (pound)158.6 million) and for the year ended December 31, 2001
were (pound)586.1 million (2000: (pound)622.8 million). The 9.5% decrease in
revenues for the fourth quarter of 2001, compared to the same period in 2000 is
due principally to a reduction in the volume of electricity sold. Sales in the
fourth quarter of 2001 totaled 4,919.3 GWh (2000: 6,685.6). The majority of this
reduction was in AES Drax's merchant sales, as the sales to TXU Europe in the
fourth quarter of 2001, were only 450GWh less than the same quarter in 2000.
This decline in volume is due to the effects of competition and the reduction in
prices, particularly during off-peak periods.

     The 5.9% decrease in revenues for the year ended December 31, 2001 compared
with the previous year, are once again primarily due to the reduction in prices
over the last twelve months and a 3.4% decrease in generation from 22,074 GWh in
2000 to 21,314 GWh. Although prices decreased over the 12 months to December
2001, the impact on AES Drax's revenues was not as significant, if you compare
total revenues to generation sold, as AES Drax's average price capture for the
year only declined by 2.5% from (pound)28.21 in 2000 to (pound)27.50 in 2001.


                                      53
<PAGE>


     Prices throughout 2001 for Annual Baseload Contracts fell from around
(pound)19.10/MWh at the commencement of NETA in March 2001 to (pound)18.45/MWh,
by December 31, 2001. The following graph shows the trend in such baseload
prices over the year ended December 31, 2001:

                            Annual Baseload Prices

                               [GRAPHIC OMITTED]

     There are a number of factors that contributed to these price peaks and
troughs:

     o    In the period prior to NETA go-live there was a great deal of
          uncertainty about how NETA would impact upon the market-place, so
          there was a sharp decline in prices through Quarter 1.

     o    Prices quickly recovered following the introduction of NETA, though
          we believe that this had more to do with an uncertainty about
          participant's bidding strategies and the general fragmentation of the
          market following the significant changes in ownership of plant that
          had occurred.

     o    Through Quarter 3 prices remained reasonably flat, staying generally
          in the range of(pound)19.00 to(pound)19.50/MWh.

     o    In Quarter 4, there was an unexpected change when the traditional
          seasonal peak in Winter 2002 did not materialize and prices dropped
          from (pound)19.00 to (pound)18.00/MWh, before recovering to around
          (pound)18.50/MWh at the close of the year. This was when the impact
          of the over-capacity that exists within the UK generation market
          became most apparent.

     Although there were significant fluctuations in market prices during 2000,
there was not the same decline as experienced during 2001. However, the impact
of such fluctuations on AES Drax's earnings were still hedged via the Hedging
Contract, which covered approximately 60% of our revenues during this period.

     Cost of sales for the quarter ended December 31, 2001, which are primarily
fuel costs were (pound)59.1 million, compared to (pound)83.4 million for the
quarter ended December 31, 2000. Cost of sales for the year ended December 31,
2001 were (pound)267.2 million, compared to (pound)278.2 million. The reduction
in fuel burnt for the fourth quarter of 2001, compared to the same period in
2000, was due to the reduction in generation from 7001.1GWh to 5,142.5GWh, which
reflected the reduced electricity sales. However, the year ended December 31,
2001 shows only a 4.1% reduction in fuel costs, reflecting the 2.4% reduction in
generation for 2001 compared to 2000 and a reduction in AES Drax's fuel costs
resulting from the change from the Innogy Coal Contract, to the one with UK Coal
Limited. The impact of the reduction is also reflected in AES Drax's load
factor, which decreased from 66.5% for the year ended December 31, 2000 to 64.4%
for the year ended December 31, 2001.


                                      54
<PAGE>


     The cost of fuel remained in line with expectations due to the transition
from the supply contract with Innogy plc (formerly National Power plc) to one
with UK Coal Limited (formerly RJB Mining). Therefore the reduced fuel costs
were in line with our expectations.

     Administrative expenses for the quarter ended December 31, 2001 were
(pound)54.1 million (2000: (pound)40.6 million) and for the year ended 31
December, 2001 were (pound)176.2 million (2000: (pound)171.0 million). These
expenses consisted primarily of fixed operations, maintenance and other variable
costs and the expenditure was broadly in line with our expectations. The
increased level of expenditure in the fourth quarter of 2001 was due to the
following:

     o    For the last quarter of 2001 BSUoS charges totaled (pound)1.8m of
          additional costs over 2000.

     o    The write-off of a bad debt of (pound)3.3 million with Enron, which
          collapsed during the fourth quarter of 2001. This write-off included
          not only AES Drax's exposure to them for energy sales but also for
          some coal trades. We believe this was actually a good result for AES
          Drax as at one stage, Enron comprised almost 50% of our trading
          activity under NETA bilateral contracts. However, we were able to
          react quickly to the changes that took place in the market in the
          run-up to Enron's demise and reduced our exposure to a more
          manageable level.

     o    The increase in AES Drax's insurance premiums following renewal in
          November, when AES Drax's premiums increased from approximately
          (pound)3.7 million per annum to (pound)7.5 million per annum. This
          significant increase in the premiums payable was due to:

          o    The impact of September 11th on the insurance market as a whole.

          o    The withdrawal of certain insurers from the power sector.

          o    Insufficient capacity available in the insurance market at the
               time of renewal.

          o    AES Drax's claims history during the first year of the policy.

          This added approximately (pound)1 million to our insurance expense
          for the quarter ended December 31, 2001 compared to the same period
          in 2000.

     o    The balance of the (pound)14m increase in administrative expenses for
          the fourth quarter of 2001, compared to 2000, was incurred on
          additional amortization expense. The amortization of an acquisition
          adjustment for the fuel contract with Innogy plc (formerly National
          Power plc) was completed when the contract expired in September 2001.
          This increased our amortization expense for the fourth quarter of
          2001 by (pound)6.9 million. Included within administrative expenses
          is (pound)1.7 million of foreign exchange losses on the dollar
          denominated notes.

     The additional (pound)5 million of administrative expenses for the year
ended December 31, 2001 compared to 2000 was primarily due to the BSUoS charges,
the Enron bad-debt and insurance. BSUoS charges are paid daily and for 2001 they
totaled approximately (pound)8.2 million.

     Interest payable and similar charges were (pound)51.3 million for the
fourth quarter of 2001, and totaled (pound)197.6 million for the year ended
December 31, 2001. The charges for the fourth quarter in 2000 were (pound)39.6
million, and (pound)177.8 million for the year 2000, representing an increase of
approximately 29.5% and 11.1% respectively, in 2001.

     The additional interest expense charged over the rates carried by the
indebtedness reflects the impact of the various interest rate and foreign
currency swaps that AES Drax has in place, plus the costs of the letter of
credit used to fund the Required Balance under the Bank Facility. The interest
rate swaps increased our interest expense as interest rates (GBP 6 month LIBOR)
had fallen to an unexpected low of 4.13625% as at December 31, 2001.

     Interest expense increased from 2000 to 2001 as a result of the refinancing
in August 2000, where AES Drax replaced a portion of the Eurobonds with the
bonds, which incur a higher rate of interest (9.07% - 10.41% vs 8.86%). A
portion of this increase was off-set by the bridging loan, which was still in
place during the first quarter of 2000 incurring interest at approximately 9%
per annum. The average rate of interest applicable to AES Drax's financial
obligations in 2001 was approximately 10.1% (2000: 8.9%).


                                      55
<PAGE>


     The December 2001 interest payment on both the Eurobonds and the bonds was
made on schedule when we remitted approximately (pound)55m to the banks and
(pound)9m and $16m to the bondholders.

     Interest receivable and other income was (pound)3.6 million for the fourth
quarter of 2001, and totaled (pound)16.2 million for the year ended December 31,
2001. The charges for the fourth quarter in 2000 were (pound)7.2 million, and
(pound)12.9 million for the year 2000, representing a decrease of approximately
50% for the fourth quarter and a 26% increase for the year 2001. This income
represented not only the interest accrued on the various bank balances held by
AES Drax, but also reflected the benefits accrued from the Harich Swap. The
increase in AES Drax's interest income was due to the reclassification of the
certain interest expense that was netted-off against interest income in 2000.
The expenditure was reclassified was mainly the costs of the letters of credit
and associated costs/fees.

     Gross profit (revenues less cost of goods sold) was (pound)84.4 million
(2000: (pound)75.2 million) for the quarter ended December 31, 2001 and
(pound)318.9 million (2000: (pound)344.6 million) for the year ended December
31, 2001. Operating profit from continuing operations was (pound)35.9 million
(2000: (pound)35.1 million) for the quarter ended December 31, 2001 and
(pound)143.1 million (2000: (pound)174.5 million) for the year ended December
31, 2001.

     This resulted in a gross margin of approximately 58.8% (2000: 47.4%) for
the last quarter of 2001 and 54.4% (2000: 55.3%) for the year ended December 31,
2001. The improvement in the gross margin during the fourth quarter of 2001
compared to the same period in 2000, was due to the improved heat rate of the
plant during the quarter. AES Drax's average heat rate for the quarter improved
by 9.6% to 9,252BTU's/KWh (2000: 8,445BTU's/KWh) in 2001.

     Due to the increased interest expense during the quarter ended December 31,
2001 we incurred a loss on ordinary activities before taxation of (pound)17.4
million (2000: Profit of (pound)2.1 million). The loss on ordinary activities
before taxation for the year ended December 31, 2001 was approximately
(pound)38.7 million (2000: Profit of (pound)8.6 million) on which we incurred
corporation tax of (pound)10.9 million (2000: (pound)22.4 million). This equates
to an effective tax rate of 28.15% (2000: 259.5%), even though UK corporation
tax rate is currently 30%. The reason for the reduced tax charge in 2001 and
increased charge in 2000 was primarily due to the significant value of the
disallowable items in our tax computation that are added back when calculating
the taxable profits in 2001 and 2000, and the impact of the deferred tax
charges.

Liquidity and Capital Resources

     Following the termination of the Hedging Contract and the appointment of
administrators for TXU Europe and TXU Europe Group on November 18 and 19, 2002,
respectively, AES Drax has traded on a fully merchant basis to generate revenue.
AES Drax did not receive payment for sales made to TXU Europe in October and the
first half of November 2002 prior to termination and the receipt and timing of
such payment, together with amounts relating to AES Drax's claim for Capacity
Damages, will now be subject to the administration process relating to TXU
Europe and TXU Europe Group. In addition to adopting a fully merchant strategy
since termination, AES Drax immediately following termination entered into an
agreement with NGC to supply power for the first five days post-termination,
which provided the benefit of advanced payments ahead of the normal Grid Trade
Master Agreement settlement date (tenth business day of the following month).
AES Drax initially took steps to restrict cash outflows by consuming stocks of
coal and hence reducing coal purchases, agreeing rescheduled payments with UK
Coal Limited, negotiating the deferment of payments for rates and VAT, agreeing
a refund of on-account corporation tax payments and generally instituting
rigorous creditor payment approval processes.

     AES Drax's ability to enter into any new medium electricity trading term
contracts was dependent on the availability of additional credit support. Under
the terms of AES Drax's Standstill Agreement, AES Drax has utilized (pound)30
million of funds under the Group Account Agreement to create a new account
called the Collateral Financing Account. This account has been used to provide
the cash collateral required by one of the Senior Lenders, National Westminster
Bank, to issue letters of credit necessary to provide the credit support
required by both AES Drax's trading counterparties and Elexon who administer
NETA.

     At present, AES Drax has entered into firm sales for approximately 55% of
AES Drax's available capacity for the period from April 15, 2003 to September
30, 2003. AES Drax is hoping to achieve a load factor of approximately 50%
through the third quarter of 2003 and an average of approximately 75% for the
whole of 2003. AES Drax's firm sales for Summer 2003 should provide an average
capture price of between (pound)15 and (pound)16 per MWh.


                                      56
<PAGE>


     As part of the Restructuring Proposal AES Drax is proposing to utilize any
funds received from the administration of the TXU group to prepay a portion of
the senior debt (though not the notes). In addition, they have outlined a debt
conversion to reduce leverage. The combination of both proposals, would allow
the business to meet the projected senior debt service cashflows using the funds
generated from the proposed trading strategy for the plant. These proposals have
been submitted to the Committees who are currently considering these proposals.
The Restructuring Proposal prepared by AES Drax Holdings does not contemplate
any recovery for the notes and current cash flow forecasts are not sufficient to
provide full recovery for our Subsidiary Obligations which are structurally and
contractually senior to the notes and secured by the group's main asset, the
Drax Power Station.

     As part of the Standstill Arrangements, the Group Account Agreement (as
defined below) was amended to create two new bank accounts:

     o    Collateral Financing Account - this account contained the (pound)30
          million of funds intended to provide collateral for credit support
          and to meet any working capital requirements. Approximately
          (pound)24.7 million has been transferred into the Cash Cover Account,
          to provide collateral for the letters of credit issued to AES Drax's
          trading counterparties for credit support.

          In addition, there is a further requirement within the revised Group
          Account Agreement whereby, any excess cash above a minimum balance of
          (pound)25 million for any continuous period of 30 days is swept from
          the Proceeds Account into the Collateral Financing Account. At March
          31, 2003 approximately (pound)21.2 million has been transferred into
          the Collateral Financing Account. Therefore, the balance on the
          Collateral Financing Account as at March 31, 2003 was approximately
          (pound)26.7 million.

     o    Cash Cover Account - this account holds the funds which provide cash
          collateral for the issuance of letters of credit by the National
          Westminster Bank.

     Under the Group Account Agreement, there are other key accounts that
contain the cash utilised for the operation of the business, or held for the
purposes of debt service. As at March 31, 2003 the balances on the following
accounts were:

     o    Senior Debt Service Reserve Account     (pound)45.2 million

     o    Insurance Reserve Account               (pound)0.02 million

     The (pound)15 million of funds previously held in this account were
transferred to the Collateral Financing Account, under the revised Group Account
Agreement.

     o    Proceeds Account                        (pound)54.1 million

     AES Drax expects to incur approximately (pound)6.8 million in capital
expenditures in the year 2003. During 2002 AES Drax spent (pound)5.2 million
(2001: (pound)6.1 million, 2000: (pound)12 million) on various capital projects,
the largest of which in 2002 was the replacement of motors on PA Fans, with
variable frequency drives which totaled (pound)1.2 million. Future capital
commitments shall be met from the working capital of AES Drax. In addition to
capital requirements associated with the ownership and operation of the Drax
Power Station, AES Drax will have significant fixed charge obligations in the
future, principally relating to the fixed operating expenses incurred in
connection with operating the station.

     Compliance with environmental standards will continue to be reflected in
AES Drax's capital expenditures and operating costs. Based on the current status
of regulatory requirements, AES Drax does not anticipate that any capital
expenditures or operating expenses associated with complying with current
environmental laws and regulations will have a material effect on its results of
operations or its financial condition other than the planned expenditures for
completing the fitting of low NOx burners to Units 2 and 3. See "Information on
the Company--Business Overview - Environmental Matters and Regulation -
Integrated Pollution Control."

     Certain of the forward-looking debt service cover ratios as of June 30,
2002 were below the level required to permit our subsidiary AES Drax Holdings to
make any distributions of available cash to us at that time. Further, AES Drax
Holdings was not permitted to make any distributions to us to permit us to make
the required interest payments of $11,500,000 and (pound)7,593,750 to our
noteholders due on February 28, 2003.


                                      57
<PAGE>


     The payment of interest on the notes in February 2002 was made, in part,
from funds in the Debt Service Reserve Account we held. AES Drax Holdings was
not permitted to make distributions to us to permit interest due on the high
yield notes to be paid on August 30, 2002. The AES Corporation, however, made a
contribution to us which together with amounts then held in the notes' debt
service reserve fund was sufficient to make the payments then due. As of
February 2003, the notes' debt service reserve accounts held a balance of
$22,142.02 and (pound)40,643.91, resulting in a significant shortfall. As a
result of the foregoing, we did not have sufficient funds to cover the required
interest payments due in February 2003 on the notes in full.

     Such payment failure constituted an event of default under the notes
subject to a 15-day grace period (which has now expired), although pursuant to
intercreditor arrangements the noteholders have no enforcements rights until 90
days following delivery of certain required notices under the intercreditor
arrangements. On May 16, 2003, we received an acceleration notice from the
Holder of our notes, declaring the notes to be immediately due and payable.

     The Notes

     A full description of the terms and conditions of the notes, security
arrangements and intercreditor arrangements, is included under "Description of
the Notes" in our F-4 Registration Statement, which description is hereby
incorporated by reference herein.

     The Bonds

     Proceeds from the issuance of the bonds were used to prepay a portion of
the fixed coupons on the Eurobonds (described below). A full description of the
terms and conditions of the bonds, common security arrangements with the
Eurobonds and intercreditor arrangements, is included under "Description of the
Bonds" in the F-4 Registration Statement filed by AES Drax Holdings, which
description is hereby incorporated by reference herein.

     The Eurobonds

     The Eurobonds are senior secured debt obligations of AES Drax Holdings with
an aggregate principal amount of (pound)1,725 million due 2015. The Eurobonds
provide for fixed semi-annual interest payments at a per annum rate of 8.86%.
The Eurobonds are not guaranteed by us or AES, and the sole source of funds for
payments due under the Eurobonds (together with payments due under the bonds)
are distributions and payments in respect of surrender of tax relief and
intercompany loans received by AES Drax Holdings from its subsidiaries.

     The terms and conditions of the Eurobonds contain covenants requiring each
of the companies subject to its terms, to:

     o    provide regular financial and other information;

     o    comply with material project agreements; and

     o    operate and maintain the Drax Power Station in accordance with agreed
          standards.

     The terms and conditions of the Eurobonds also contain covenants limiting
the ability of each of the companies subject to the terms thereof to:

     o    incur additional debt;

     o    pledge assets;

     o    enter into sale-leaseback transactions;

     o    make loans other than certain permitted intercompany loans;

     o    make capital expenditures;

     o    enter into mergers or sell assets;


                                      58
<PAGE>


     o    change lines of business;

     o    make distributions or other payments with respect to its share
          capital;

     o    open or maintain any accounts other than in accordance with certain
          account agreements; and

     o    enter into, amend or terminate any Acquisition agreement, project
          document or any of the agreements relating to the Subordinated
          Obligations or the notes.

     In addition, the terms and conditions of the Eurobonds restrict the making
of distributions to make payments on the notes and distributions to AES unless
AES Drax complies with certain debt service coverage and other financial ratios.
See "-Limits on Distributions under the Subsidiary Obligations."

     The terms and conditions of the Eurobonds contain the following events of
default:

     o    failure to make payments when due;

     o    failure to comply with certain covenants;

     o    any material misrepresentation;

     o    the default under other debt of any relevant company or, in certain
          cases, under the Hedging Contract;

     o    the occurrence of a bankruptcy or insolvency proceeding involving any
          relevant party or any party to a material project document;

     o    any cessation of all or a substantial portion of its business by a
          relevant company or any party to a material project document which
          cessation by such party would be likely to have a material adverse
          effect;

     o    breach by any AES Drax company of a project document or any breach by
          a third party to a material project document that is likely to have a
          material adverse effect on the ability of the holders to be repaid
          under the Eurobonds or of the Senior Lenders to be repaid under the
          Bank Facility;

     o    failure to maintain all material permits;

     o    effectiveness of the collateral securing the loans;

     o    abandonment or nationalization of the Drax Power Station;

     o    the cancellation, suspension or cessation of required insurance
          coverage;

     o    loss of title to material assets or the occurrence of extended and
          material force majeure;

     o    an inability to carry on business or to make payments when they come
          due as a result of changes in the regulatory regime;

     o    default in the satisfaction of legal judgments;

     o    failure to satisfy minimum loan life and historic debt service
          coverage ratios; and

     o    change of control events relating to the AES Drax companies or
          InPower Limited.

     AES Drax Holdings is also required to make customary representations and
warranties on behalf of ourselves and the other relevant companies. As a result
of developments during the second half of 2002, including, in particular, the
termination of the Hedging Contract, a number of defaults and events of default
have occurred under the Eurobonds. These defaults or events of default have been
permanently or temporarily waived under the Standstill Agreement.


                                      59
<PAGE>


     The Bank Facility

     The Bank Facility is a senior secured credit facility comprised of term
loans from the Senior Lenders. The net proceeds of the bonds used to prepay the
fixed coupons on the Eurobonds were used by InPower Limited to repay
approximately (pound)370 million of the Bank Facility. As of March 31, 2003, the
aggregate principal amount outstanding under the Bank Facility is (pound)842.6
million. InPower Limited's obligations under the Bank Facility are secured by
security granted over the Eurobonds from InPower Limited and indirectly by
BondPower Limited as assignee of the principal of the Eurobonds. The obligations
under the Eurobonds have the benefit of security from our subsidiaries and
certain other AES Drax companies, which is the same security available for the
bonds and rank pari passu with the bonds. Therefore, if the Senior Lenders
enforce the Bank Facility, subject to the provisions of the AES Intercreditor
Deed with the trustee for the bondholders, they will have the right to control
the enforcement of the security package granted in respect of the Eurobonds. In
addition the Banks have the ability upon enforcement to sell the Eurobonds (or
any part of them) to third parties.

     Pricing on the loans under the Bank Facility is based on the London
interbank offered rate (Libor), reset periodically, plus a margin ranging from
1.50% to 3.0%, depending on the ratings that Moody's, Standard & Poor's and Duff
& Phelps assign the loans from time to time. Currently the loans are rated Caa2
by Moody's, D by Standard & Poor's, and CC by Fitch (formerly Duff & Phelps)
resulting in an interest rate currently of Libor + 3.00% (effective from January
1, 2003). These ratings reflect downgrades by all three rating agencies, as a
reaction to the termination of the Hedging Contract and the signing of the
Standstill Agreement.

     Scheduled amortization of the Bank Facility loans consist of payments of a
percentage of the principal of the loans, together with accrued interest, in
six-month intervals which commenced June 30, 2000. Scheduled repayments range
under the Bank Facility from 0.3% to 5.15% of the current aggregate principal
amount of (pound)842.6 million. A principal installment of (pound)30,770,000
(2001: (pound)22,625,000) was due on December 31, 2002 and the final installment
due on June 30, 2015 will be (pound)40,725,000, or 4.8% of the (pound)842.6
million aggregate principal amount of the loans. The principal payment due on
December 31, 2002 was deferred in accordance with the terms of the Standstill
Agreement and the restructuring proposal would make additional changes to the
existing amortization schedule.

     In addition, AES Drax Holdings has an obligation to prepay the coupons on
the Eurobonds and to offer to repurchase the bonds if it receives proceeds from
(1) certain payments from the UK Government to compensate for any loss of
property rights or (2) certain insurance awards. These proceeds shall be applied
pro rata among the bondholders and the holders of the coupons of the Eurobonds,
taking into account any net payment under the AES Drax Swap. If any bondholder
does not exercise its rights pursuant to the offer to purchase, the pro rata
portion of the payment allocated to such bondholder shall be applied in
repayment of the coupons on the Eurobonds at the net present value of the coupon
amount, taking into account any net payment under the AES Drax Swap. InPower
Limited has agreed to use any such payments received from a prepayment of the
coupons on the Eurobonds to prepay loans made under the Bank Facility.

     The Bank Facility has covenants, events of defaults and representations
that match those of the Eurobonds, and InPower Limited and BondPower Limited
have agreed that the exercise of their rights and remedies under the Eurobonds
will be at the direction of the security trustee for the Senior Lenders. The
existence of any event of default would permit the Senior Lenders to accelerate
the loans. If the Senior Lenders chose to accelerate the loans, the loans would
become immediately due and payable. As the Eurobonds have been pledged to the
Senior Lenders as security for the Bank Facility, the Senior Lenders, subject to
the terms and conditions of the AES Intercreditor Deed, would have the option to
control the enforcement of the Eurobonds.

     Repayment of the Bank Facility and Eurobonds

     Repayment of principal and interest on the loans made under the Bank
Facility can only be funded through:

     o    payment of the fixed rate coupons on the Eurobonds by AES Drax
          Holdings to InPower Limited; and

     o    payments (if any) by AES Drax under a swap with Harich (which is
          back-to-back with a swap between Harich and InPower Limited) (the
          "Harich Swap").

     Any such payments shall be made on a pari passu basis with payments due on
the bonds and are subject to the cashflow waterfall.


                                      60
<PAGE>


     Application of Principal Payments Received on the Eurobonds

     Under the terms of a subscription agreement between InPower Limited and AES
Drax Holdings, InPower Limited has agreed to subscribe for preference shares of
AES Drax Holdings on the maturity date of the Eurobonds. InPower Limited is
required to apply all principal payments under the Eurobonds, once all amounts
outstanding on the Bank Facility have been paid in full, to that subscription.
InPower Limited sold to AES Drax Acquisition Limited the right to receive the
preference shares when they are issued in exchange for an up front (pound)425
million payment, which InPower Limited used in part to fund its acquisition of
the Eurobonds.

     Swaps with Harich to facilitate InPower Limited Payments

     Payments of principal and interest on the loans by InPower Limited under
the Bank Facility are serviced by corresponding payments made by AES Drax
Holdings with respect to the Eurobonds. However, while InPower Limited receives
fixed rate interest payments with respect to the Eurobonds, it is required to
pay floating rate interest on the loans under the Bank Facility. In addition,
the scheduled payments of principal and interest under the Eurobonds do not
match scheduled debt service on the loans. As originally modeled, it was likely
that, in the early years, amounts payable on the Eurobonds would be insufficient
to pay debt service on the loans and in the latter years such amounts would
exceed debt service.

     In order to balance its payments and receipts, InPower Limited has entered
into a fixed to floating rate swap with Harich, which we refer to as the InPower
Swap, which will cover interest payments on the aggregate outstanding principal
amount of the loans under the Bank Facility, and Harich has entered into an
almost identical fixed to floating swap with AES Drax, which we refer to as the
AES Drax Swap, the only difference being that AES Drax will make an additional
payment to Harich to finance Harich's expenses and tax liabilities. The intended
effect of the swaps is to ensure that interest payments with respect to the
Eurobonds will be adjusted to match required debt service under the Bank
Facility.

     AES Drax is required under the terms of the Eurobonds to hedge a minimum of
50% of its interest exposure on a two year rolling basis. It currently has
hedged (pound)623 million of its floating rate exposure on a two year basis and
has implemented a hedging program intended to address the requirements under the
Eurobonds.

     Mechanics of Swaps

     Under the InPower Swap, InPower Limited receives interest calculated on the
basis of a floating rate from Harich, matching the interest on the outstanding
principal amount of the loans under the Bank Facility and pays a series of fixed
amounts to Harich. The AES Drax Swap is on identical terms except as described
above. It is anticipated that in the early years InPower Limited will be the net
recipient of payments under the swaps and in the later years AES Drax will be
the net recipient. The intended effect is to ensure that interest payments with
respect to the Eurobonds combined with the Swaps match required debt service
payments under the Bank Facility.

     Harich's only business is to enter into the swaps described in this
section, and its obligations to pay under one swap will be conditional on
receipt of the corresponding payment under the other swap.

     Impact of Mandatory Prepayments

     The Bank Facility imposes mandatory prepayments on InPower Limited in
certain circumstances, including if there is any voluntary prepayment of the
Eurobonds. Prepayments under the Bank Facility and the Eurobonds will affect the
amounts to be paid under the swaps described above. In the event there is a
prepayment under the Bank Facility and the Eurobonds, the swaps with Harich
either will be adjusted or an additional swap will be entered into (including
the notional amount on which interest is paid and the fixed interest payments
and any amounts then owing under the swap transactions) to take account of the
prepayment in order to ensure that at such date, payments received with respect
to the Eurobonds, as adjusted by the swaps, will be approximately equal to (but
not less than) the debt service obligations with respect to the Bank Facility.
Any such adjustment may involve payment of an adjustment amount by either
InPower Limited or AES Drax, which is intended to balance the effect of payments
on the Eurobonds.

     AES Drax has sought to mitigate any possible exposure to fluctuations in
the current market price for electricity by entering into contracts relating to
the sale of electricity.


                                      61
<PAGE>


     Limits on Distributions under the Subsidiary Obligations

     As typical for a project financing such as the Drax Power Station, all cash
receipts are paid into specified accounts and any cash outflows from AES Drax
are required to pass through a series of accounts, referred to as the Cashflow
Waterfall, established pursuant to the terms of a group account agreement
entered into pursuant to the terms of the Eurobonds, the Bank Facility and the
bonds, which we refer to as the Group Account Agreement. In addition,
distributions and other payments to shareholders from which payments on the
notes were to be made were only permitted if the financial ratio tests in the
Eurobonds, the Bank Facility and the bonds were met. Cash would not be released
from the project accounts in the event AES Drax failed to meet the required debt
service cover ratios. See "Tests and Financial Ratios under the Subsidiary
Obligations" and "Description of the Notes-Restrictions on Distributions"
incorporated by reference herein to the description "Description of Notes" set
forth in the F-4 Registration Statement. Since June 30, 2002 no distributions or
other payments to shareholders have been or may be made. This is due to the
failure to satisfy certain ratio tests, to the termination of the Hedging
Contract and the existence of certain defaults and events of default under the
Eurobonds, the Bank Facility and the bonds. The terms of the Cashflow Waterfall
and the Group Account Agreement are expected to be reconsidered as part of the
debt restructuring proposal being considered by certain of the senior creditors.
Such restructuring proposals are not expected to provide for any recovery on the
notes.

     Exposure Account

     AES Drax is required to maintain an exposure account to cover certain
balancing charges that may arise under the balancing and settlement code to be
introduced under NETA and certain contractual damages. These charges would
arise if the Drax Power Station was unable to generate sufficient electrical
capacity to satisfy its obligations under contracts or if it over-supplies
power.

     AES Drax will be obligated to make deposits into the exposure account if
the projected net exposure to balancing charges and similar expenses for the
six month period following the date on which the projected net exposure is
calculated (generally on each interest payment date) is greater than (pound)15
million, in an amount sufficient to cover such projected exposure.

     Funding of Debt Service Reserve Accounts

     Pursuant to the Group Account Agreement, AES Drax had agreed to maintain a
debt service reserve account with a minimum balance, to be funded from cashflow,
which we refer to as the Required Balance, which initially was equal to the
greater of (a) the aggregate of six months' interest payments on the Eurobonds;
six months' interest and principal on the bonds and the net payment by AES Drax
under the AES Drax Swap relating to the next interest payment date and (b)
(pound)50 million.

     AES Drax was permitted to substitute a letter of credit (or other demand
instrument) with a renewable maximum maturity of six months (in an agreed form
and from a bank with a rating by Standard & Poor's or Moody's of at least A and
A2, respectively (if rated by both)) in lieu of cash in the debt service reserve
account. Such letter of credit (or other demand instrument) was required to have
a face value equal to the amount necessary to maintain the minimum balance plus
an amount equivalent to interest which would have been earned on such amount in
the debt service reserve account. Letters of credit were utilized to fund the
Required Balance due at December 31, 2002.

     The Required Balance was funded via a letter of credit from Canadian
Imperial Bank of Commerce (CIBC) totaling (pound)52.25 million and the balance
of the (pound)104.5 million, being provided from the Bank of America, backed by
the AES Corp revolver. However, as part of the Standstill Arrangements a demand
was made on the Standstill Date under the DSRA Letter of Credit issued by CIBC
for the maximum amount available of (pound)52.25 million.

     These funds were used in part to fund the Collateral Financing Account and
to pay the debt service payments that were due on December 31, 2002 to the
Senior Lenders. On the Standstill Date, (pound)52.25 million was transferred
from CIBC into the Debt Service Reserve Account. On the same day, all of the
funds held in the Holding Account, which was a further (pound)58.7 million were
also transferred into the Debt Service Reserve Account. On December 11, 2002
(pound)15 million was transferred from the Debt Service Reserve Account to the
Collateral Financing Account. Finally, on December 30, 2002, (pound)53.4 million
was transferred from the Debt Service Reserve Account to the Proceeds Account
and used to make the debt service payments of:


                                      62
<PAGE>


     o    Eurobond interest payment to Inpower Limited

     o    amounts due in respect of the Harich Swap to Inpower Limited

     o    payments due to the interest rate swap and currency swap
          counterparties

     o    payment of the bond interest payments due on December 31, 2002

     Under the Standstill Agreement, the Security Trustee may also make a
further demand against the remaining letter of credit of up to (pound)15.4
million. However, no such demand has yet been received. It is envisaged that as
part of the restructuring process that all of the funds available, (pound)52.25
million, under the remaining letter of credit with Bank of America will be
called by the Security Trustee.

     AES Drax anticipates that the arrangements for the funding of senior debt
service reserve accounts will be revised as part of any restructuring with the
senior creditors, although there can be no assurance that any such restructuring
will be achieved.

Key UK Tax Assumptions

     The financing of the Acquisition was structured to enhance the cash flows
available to service the Finance Obligations and to make distributions
sufficient to pay principal and interest on the notes as well as make
distributions to AES. The structure is premised on the following key tax
assumptions, which we refer to as the key tax assumptions:

     o    interest payable with respect to the Eurobonds and the bonds will be
          deductible for UK tax purposes and the interest amounts can be
          surrendered by way of group relief;

     o    payments on the notes, the bonds and the Eurobonds will not be
          subject to UK withholding tax as a result of the notes, the bonds and
          the Eurobonds being eurobonds listed on a recognized stock exchange
          (within the meaning of Section 841 of the Income and Corporation
          Taxes Act 1988), or otherwise;

     o    there will be no UK tax levied on AES Drax Acquisition Limited in
          respect of the shares which it purchased from InPower Limited under
          the forward purchase agreement referred to above under "Information
          on the Company-Financing" (or of the right to these shares);

     o    there will be no apportionment under the controlled foreign company
          rules of any chargeable profits and creditable tax to us or AES Drax
          Acquisition Limited in any accounting period of either company under
          UK tax law; and

     o    the Eurobonds will not be repaid early.

     The above is not a full list of the UK tax assumptions on which the
acquisition structure is premised. If any of the above or other tax assumptions
prove to be incorrect, it could materially adversely affect our levels of cash
flows available to service our debt obligations.

Cash Flows

     Operations

     Under AES Drax Holdings' Standstill Arrangements, the Senior Lenders and
certain bondholders have agreed to certain amendments and waivers to their
respective financing documents which permitted AES Drax to have access to
(pound)30 million of funds previously unavailable under the financing
documentation, (pound)15 million of which was released from the insurance
reserve account, set up previously as part of the bank waiver/insurance renewal
process in the first half of 2002. These funds, subject to certain consent
rights of the steering committee of the Senior Lenders and the ad hoc committee
of bondholders, are available to provide credit support to electricity
counterparties and suppliers and for working capital needs.

     A portion of the coupon due on December 31, 2002 on the Eurobonds
equivalent to the interest due on the Bank Facility and the interest on the
bonds were paid on the due date from the senior debt service reserve accounts.
The debt


                                      63
<PAGE>


service reserve account for payments on the Eurobonds and bonds was fully
funded, and we obtained the necessary waivers to permit such funds to be used
to make payments due at the year-end. The requisite amendments and waivers
necessary were reflected in the terms of the Standstill Agreement. In addition,
the Eurobond Trustee agreed not to enforce security during the standstill
period notwithstanding that the portion of the coupon due to the holders of the
Eurobonds on December 31, 2002 equivalent to the principal payment due under
the Bank Facility was not made.

     The downgrades of the senior debt increased the interest payable on the
Eurobonds, where the margin above GBP LIBOR has now increased to 300 basis
points.

     Based on cashflow forecasts prepared on the basis of the measures being
implemented and the additional credit support and working capital that has been
made available as part of the Standstill Agreement, as well as AES Drax's
implementation of an electricity trading strategy as a fully merchant plant, AES
Drax believes that it will have adequate cashflow to satisfy its operational
needs through December 2003. However, AES Drax does not have sufficient funds to
satisfy its debt obligations and is currently in discussions with its Senior
Lenders and an ad hoc committee of bondholders regarding the restructuring of
these senior obligations. AES Drax does not expect to have the ability to make
distribution to permit payments on the notes and is not currently engaged in any
formal discussions regarding the notes. No assurance can be given that any
successful restructuring will be achieved and that any restructuring will be
agreed or implemented prior to the Standstill Termination Date, or that such
period would be extended.

     The table below shows our estimates of the debt service payable (interest
and principal) under the current terms of AES Drax's financial obligations on
each source of debt over the next five years. The cash flow from the operations
of the Drax Power Station is not currently sufficient to meet these obligations
and we expect certain of these amounts to change as a result of the ongoing
consideration of our restructuring proposal by certain senior creditors.

<TABLE>
                            2003              2004               2005              2006              2007
                      ----------------  ----------------   ----------------  ----------------  ----------------
                      ((pound)million)  ((pound)million)   ((pound)million)  ((pound)million)  ((pound)million)
<S>                         <C>               <C>                <C>               <C>               <C>
Bank Facility......         111.6             112.1              102.8             103.5             103.5
Bonds..............          36.5              36.5               36.5              36.5              36.5
Notes..............          31.6              31.6               31.6              31.6              31.6
</TABLE>

     As of December 31, 2002, AES Drax's known contractual obligations are as
follows:

<TABLE>
                                               Payment due by period (amounts in millions)
------------------------------------------------------------------------------------------------------------
   Contractual obligations         Total      Less than 1 year  1 to 3 years  3 to 5 years    Over 5 years
--------------------------- ----------------  ----------------  ------------  ------------  ----------------
<S>                         <C>               <C>               <C>           <C>           <C>
Indebtedness............... (pound)  2,125.0  (pound)       --  (pound)   --  (pound)   --  (pound)  2,125.0
Purchase Obligations....... (pound)      0.6  (pound)      0.2  (pound)  0.3  (pound)  0.1  (pound)       --
                            ----------------  ----------------  ------------  ------------  ----------------
Total                       (pound)  2,125.6  (pound)      0.2  (pound)  0.3  (pound)  0.1  (pound)  2,125.0
</TABLE>

     Under UK GAAP, there is no amortization of the Eurobonds, the bonds or the
notes disclosed on the balance sheet and the coupon payments made by us in
respect of the Eurobonds are matched to the amortization profile of the Bank
Facility, via the Harich Swap. The cash payments made are shown in the table
above which summarises the debt service payable in cash terms. Following the
loss of the Hedging Contract, we undertook a full review of the carrying value
of all assets, which has resulted in a write-off in our fourth quarter results
(see "--Results of Operations").

     Investing Activities

     We engaged in no material investing activities for the quarter ended
December 31, 2002, other than AES Drax's capital expenditure that was agreed as
part of the annual budget. During the year, AES Drax spent (pound)5,224,000
(2001: (pound)6,119,000, 2000: (pound)11,993,000) on various capital projects,
including most significantly, the replacement of motors on PA fans in 2002, the
installation of low NOx burners on Unit 1 in 2001 and replacement of the
generator rotor on Unit 3 in 2000.

     Financing Activities

     We engaged in no material financing activities for the quarter ended
December 31, 2002.


                                      64
<PAGE>


     On December 31, 2002 AES Drax Holdings used cash from the senior debt
service reserve account to pay a portion of the coupon due on the Eurobonds
(corresponding to the interest due under the Bank Facility) and the interest due
on the bonds.

Trend Information

     See "Information on the Company--Significant Developments During 2002 and
Recent Developments."

Item 6.  Directors, Senior Management and Employees

     Neither we nor any of our subsidiaries, other than AES Drax, has any
operations or any management or employees. AES Drax's managers are appointed by
AES from time to time and hold their positions at the discretion of AES Electric
Limited, the AES subsidiary responsible for overseeing AES's power plant assets
in the UK. AES Electric Limited may elect to appoint additional managers from
time to time.

     The following tables set forth certain information concerning the
management team of AES Drax as of March 31, 2003.

Senior Management

                    Name               Age                  Position
                    ----               ---                  --------
     Garry Levesley.................    42     President & Plant Manager
     Cassim Mangerah................    34     Head of Commodity Risk Management
     Ian Foy........................    44     Sales & Marketing Manager
     John Lowen.....................    51     Commercial Manager
     John Prickett..................    51     Generation Business Manager
     Martin Jenkins.................    45     Engineering & Maintenance Manager
     Roddy Mackinnon................    37     Chief Financial Officer

     Garry Levesley, AES Drax's President and Plant Manager, was promoted in
2002 to the level of Vice-President of the global AES Corporation having worked
with AES since September 1994 and replaced Naveed Ismail on September 10, 2002
as Station Manager and President of AES Drax Power Limited, thus enabling Naveed
Ismail to focus on other AES Power plants in the UK. His experience within AES
covers the construction and operation of the Medway Power Plant in Kent, Plant
Manager of power plants in Hungary, management of the Altai Energo utility in
Kazakhstan and for the past 3 years he lived in Moscow where he was leader of
the AES Silk Road Group, which manages all AES businesses in the Former Soviet
Union and Central Asia. The appointment of Mr. Levesley as a Vice President of
AES Corporation and as President and Station Manager of AES Drax Power Station
reflects the importance of Drax within the AES Corporation Portfolio.

     Cassim Mangerah, Head of Commodity Risk Management at Drax, is an
Engineering Graduate who also qualified as a Chartered Accountant with the
Financial Services Group of KPMG London. Since leaving KPMG in 1997 he has
worked exclusively as a Power Trading and Risk Management professional. He
joined Enron's Continental Power Trading Group during the growth phase of the
traded power markets in Europe. After three and a half years at Enron, he joined
Williams in 2001 to help them set up their European trading operations and was
their first local hire. Cassim joined AES in his current role in January 2003.

     Ian Foy is the Sales & Marketing Manager of AES Drax. Mr. Foy has been with
the Drax Power Station for over 20 years. He transferred to AES from National
Power plc with the acquisition of the Drax Power Station and has been involved
in commercial operations at the Drax Power Station for the past six years.

     John Lowen, AES Drax's Commercial Manager, is a member of AES Drax's
leadership team. Mr. Lowen is a qualified management accountant, who joined AES
in January 1997. He worked initially in Hungary and then spent two years as an
accountant at the Medway plant in Kent. Prior to joining AES, he held a number
of senior financial posts within British Coal. John has been part of the Drax
project team throughout the acquisition process.


                                      65
<PAGE>


     John Prickett, AES Drax's Generation Business Manager, is a qualified
Mechanical and Electric HNC, who came to the Drax Power Station in 1973 as an
instrument mechanic assisting in the commissioning of the power station. He has
held a number of positions at the Drax Power Station since that time, including
Process Supervisor in Generation from May 1992-February 1997 and Shift Manager
from February 1997-April 2000. Since April 2000, John has served as the
Generation Business Manager.

     Martin Jenkins, Engineering & Maintenance Manager for AES Drax Power Ltd,
was trained as an engineer by the CEGB and holds a BSc (Hons) and a Certificate
in Management. He has worked in a number of power plants in the UK and overseas
where he has held engineering posts in operations, commissioning and
maintenance. He has worked at Drax since 1986 as an engineer, Shift Manager,
Project (Outage) Manager and (since September 2001) the Engineering &
Maintenance Manager.

     Roddy Mackinnon, Chief Financial Officer of AES Drax Power Limited,
qualified as a Chartered Accountant in 1990 and is a member of the Institute of
Chartered Accountants of Scotland. He previously worked for Deloitte & Touche in
Glasgow and then spent two years with them in Bermuda, before joining National
Power plc in 1992. He transferred to AES from National Power plc with the
acquisition of the Drax Power Station and has been led the finance team at the
Drax Power Station for the past six years.

Directors

<TABLE>
                    Name             Age             Position                Director Since
                    ----             ---             --------                --------------
<S>                                  <C>   <C>                              <C>
     Garry Levesley................. 42    President & Plant Manager (1)    October 21,2002
     John Turner.................... 44    Project Director                 August 26, 1999
     Neil Hopkins................... 38    Group Accountant                 August 26, 1999
     Naveed Ismail.................. 41    Group Manager (1)                  May 31, 2002
     Angela Padbury................. 26    Company Secretary
</TABLE>

---------
(1)  New Directors appointed in 2002.

     Neil Hopkins joined Ernst & Young in 1986. He qualified as a chartered
accountant in 1989. He spent three years working with Ernst & Young in Toronto
from 1990 to 1993. He joined AES in 1995 and is currently Finance Director of
Electric, Horizons and Sirocco. He holds Director and Company Secretary
positions in nearly all UK registered AES companies.

     John Turner, the Project Director for AES Drax, joined Schlumberger in 1980
and held numerous engineering and management positions in the Middle East and
North Sea regions. In 1988, Mr. Turner was seconded as a consultant to a German
oil and gas company. In 1992, he served as Country Manager in P.R.China with
Schlumberger and in 1994 transferred to Paris as a Project Manager. He joined
AES in 1996, initially as a Development Manager working on AES's business
development activities in the UK and Central and Eastern Europe. In 1999, he
became Project Director for AES Drax.

     Naveed Ismail was appointed as director in May 2002. Prior to his move to
the UK, Mr. Ismail was the President of AES Andes since April 2001, a business
group within AES, responsible for all AES businesses activities in Argentina,
Chile and Uruguay. Prior to his appointment as leader of this group, Mr. Ismail
was President of AES Ekibastuz, a 4000 MW coal fired power plant in Kazakhstan.

Compensation of Management

     The aggregate amount of compensation to be paid by AES Drax to all members
of management as a group, on an annual basis for services rendered to AES Drax
in all capacities, is estimated to be $1 million. In addition, it is anticipated
that AES Drax will make annual payments to its affiliates for services rendered
in an amount not to exceed $750,000.

     All members of AES Drax's management will participate in employee benefit
plans and arrangements sponsored by AES, including The AES Corporation Incentive
Stock Option Plan and other plans which may be established in the


                                      66


<PAGE>


future. AES Drax will not reimburse AES for the costs of providing benefits to
such person under any other existing plan.

Employees

     Approximately 90% of AES Drax's employees who operate and maintain the Drax
Power Station were formerly employed by National Power Drax Limited. As of
December 31, 2002, AES Drax employed 490 full-time employees at the Drax Power
Station. Approximately 78% of the employees who currently work at the site have
been employed there for more than 10 years. The employment contracts of most of
the Drax Power Station's employees are covered by a series of company agreements
with the unions that are recognized at the plant. We believe that Drax Power
Station's employee relations are good.

Board Practices, Share Ownership - Not applicable.

Item 7.  Major Shareholders and Related Party Transactions

     We and AES Drax are indirect, wholly owned subsidiaries of AES. Since our
formation, AES has provided all of the equity funds for our business and
operations. Our and AES Drax's only other sources of funding are AES Drax's
internally generated cash flow from the Drax Power Station and amounts which
were made available under the Eurobonds, bonds, notes and the bridge loans. See
"Information on the Company--Financing." In the event of a shortfall between the
amount of our commitments and internally generated cash flows from the Drax
Power Station, AES is not obligated to provide any loans or equity contributions
to make up such shortfall.

     AES's existing plants in England and Wales, including AES Indian Queens
(Newquay, England), AES Fifoots Point (Newport, Wales (in administrative
receivership)), AES Barry (Barry, Wales), participate, and Medway Power Limited
(Medway, England) which is operated by an AES affiliate and 25% owned by AES
also participates in the wholesale electricity trading markets in England and
Wales following implementation of NETA. However, each AES facility is a separate
business entity, and there is no assurance that such facilities will not compete
with each other in the wholesale electricity trading market following
implementation of NETA. The Fifoots Point plant has been put up for sale by its
administrative receiver, KPMG.

Item 8. Financial Information

Consolidated Statements and Other Financial Information

     The Consolidated Financial Statements are included in Item 17 of this
Annual Report.

Legal Proceedings

     TXU Administration

     On November 19, 2002, TXU Europe and TXU Europe Group were placed into
administration. The TXU group companies creditors' committees have been holding
regular meetings, by conference call and in person, since the administrators
were appointed. AES Drax is serving on the creditors' committee for both TXU
Europe and TXU Europe Group.

     In order to receive information from the administrators in its role as a
member of the creditors' committees, AES Drax has been required to sign
confidentiality undertakings in relation to all information it receives in such
capacity. AES Drax has submitted a claim for capacity damages of approximately
(pound)266 million as well as a claim of approximately (pound)85 million for
unpaid electricity in the TXU administration.

     Judicial review of transmission losses decision

     AES Drax has submitted an application seeking permission for a judicial
review of the decision by the Gas and Electricity Markets Authority to implement
a zonal transmission losses scheme in England and Wales. Transmission losses are
inevitable, with the majority of electricity lost through a function of current
flowing through transportation equipment and causing heating of that equipment;
these losses increase with distance. Most generation is located in the North of
England and Scotland while most demand is in the South. This means electricity
is transported long distances


                                      67
<PAGE>


from generators to users, which increases losses. Introducing a zonal
transmission losses scheme will mean that power stations in the North, such as
AES Drax, and customers in the South will suffer a loss. AES Drax has been
working with other generators and convened a consortium to take the matter
forward.

     British Energy

     AES Drax has lodged an application with the European Courts to annul the
state aid decision taken by the European Commission in favor of British Energy.
In November 2002, the European Commission authorized a (pound)650 million loan
that had been granted by UK Government to aid British Energy following the
collapse in wholesale power prices. Central to the case made by AES Drax is that
the European Commission failed to take into account the impact of the State aid
on competitors. The application was filed with the European Court of First
Instance in Luxembourg, the European Union's second highest court in April 2003.
The European Commission is currently studying the UK Government's long-term
restructuring plan for British Energy, which was submitted to Brussels in March
2003.

     General

     AES Drax Energy is not party to any legal proceedings other than in the
ordinary course of business, the ultimate resolution of which is not expected to
have a material adverse effect on the financial position or profitability of AES
Drax Energy or the other AES Drax companies.

Significant Changes

     Except as described under "Information on the Company--Significant
Developments During 2002 and Recent Developments", no significant change has
occurred since December 31, 2002, the date of the financial statements included
in this annual report.

Item 9. The Offer and Listing

     The bonds and notes are listed on the Luxembourg Stock Exchange.

Item 10. Additional Information

Memorandum and Articles of Association

     AES Drax Energy Limited is an exempted company incorporated with limited
liability under the laws of the Cayman Islands (Register No. 9.97553) on
February 28, 2000 under the Companies Law (1998 Revision). The objects of the
company are set out in full in clause 3 of the memorandum of association which
provides, among other things, that the Company's objects are to issue securities
and to engage in or carry on any lawful trade, business or enterprise that the
directors deem appropriate.

     Directors. A Director may not vote in respect of any contract or
transaction in which he is interested unless the nature of the interest of such
Director in such contract or transaction shall be disclosed by him at or prior
to its consideration or vote thereon. The remuneration to be paid to the
Directors shall be such remuneration, as the Directors shall determine.

     There is no age limit requirement for the retirement of Directors; however
a Director shall be removed from office: (i) if he gives notice that he resigns
the office of Director; (ii) if he absents himself from three consecutive
meetings of the Board of Directors without special leave of absence and the
Directors pass a resolution that he has by reason of such absence vacated the
office of Director; (iii) if he dies, becomes bankrupt or makes any arrangement
or composition with his creditors generally; or (iv) if he is found a lunatic or
becomes of unsound mind. In addition, the company may by resolution appoint or
remove a Director.

     The Directors may exercise all the powers of the company to borrow money. A
shareholding qualification for Directors may be fixed by the company in a
general meeting, but unless and until so fixed no qualification shall be
required. To date, there is no shareholding requirement for Directors.

     Share Capital. The share capital of the company is (pound)2,000,000,000
divided into 2,000,000,000 shares of a nominal or par value of (pound)1.00 each
with the power for the company insofar as it is permitted by law, to redeem or
purchase any


                                      68
<PAGE>


of its shares and to increase or reduce its share capital subject to the
provisions of the Companies Law (1998 Revision) and its articles of association
and to issue any part of its share capital with or without any preference,
priority or special privilege. No dividend or distribution shall be payable
except out of the profits of the company or out of the share premium account or
as otherwise permitted by applicable law.

     Under the laws of England which govern certain of our subsidiaries,
distributions are payable on a company's shares only out of profits available
for distribution. In addition, the ability of an English company or a subsidiary
of an English company to make loans to its parent for the purpose of paying
interest and/or principal on the bonds or notes is limited by English law
relating to the giving of financial assistance by an English company for the
purpose of reducing or discharging any liability incurred for the purpose of the
acquisition of its shares (or those of any parent company). In order to make
such a loan, the board of directors of the company making such a loan must
determine that (i) the making of the loan will not result in a diminution in the
net assets of the company or, if it does, there are sufficient distributable
reserves to absorb the diminution, (ii) immediately after the loan is made,
there are no grounds on which the company could be found to be unable to pay its
debts and (iii) the company will be able to pay its debts as they come due
during the year following the making of the loan. In addition, the auditors for
the company must provide a report to the directors that they are not aware of
anything that would indicate that the opinions expressed by the directors on
items (ii) and (iii) of the previous sentence are unreasonable. If this
procedure cannot be satisfied then it will not be possible to make the
intercompany loan.

     Voting. Every member who is present in person or by proxy at any general
meeting of the company has one vote on a show of hands. On a poll every member
who is present in person or by proxy shall have one vote for each share
registered in his name in the register of shares. If any sum remains unpaid in
relation to a member's shareholding, such member shall not be entitled to vote.

     Liquidation. If the company shall be wound up and there is a surplus, the
excess shall be distributed amongst the members in proportion to the capital
paid up on the shares held by them.

     Redemption provisions. Subject to the Companies Law (1998 Revision), any
share may be issued on terms that it is, at the option of the Company or the
holder of such share, redeemable. The company has no redeemable shares in issue.

     Calls on capital. The Directors may make calls upon the members in respect
of any monies unpaid on their shares.

     Variation of rights. The company may by ordinary resolution alter or amend
its memorandum of association otherwise than with respect to its name and
objects or to reduce it share capital. The company may by special resolution
alter or amend its memorandum of association with respect to its name and
objects or to reduce it share capital. If at any time the share capital of the
company is divided into different classes, the rights attaching to any class may
be varied by special resolution or with the consent in writing of the holders of
two thirds of the issued shares of that class. In addition, the company is
strictly limited, by the terms of its existing financing documents, in its
ability to vary the terms of its articles and memorandum of association.

     Annual and other general meetings. As an exempted company, the company may
but is not required to hold an annual general meeting. The business of any such
meeting will be stated in the notice for such meeting. The Directors may
whenever they see fit convene a general meeting of the company and must convene
such a meeting upon the requisition of member of the company. At least 5 days'
notice shall be given of an annual or other general meeting. The notice shall
specify the place, the day and the hour of the meeting and the general nature of
the business to be transacted. Subject to the limitation described above,
members are allowed to attend and vote at general meetings.

     Limitations on foreign shareholders. There are no limitations imposed by
Cayman Island law or the company's memorandum or articles of association on the
right of non-resident or foreign shareholders to hold or vote the company's
shares, other than the limitations that would apply to all of the company's
shareholders.

Exchange Controls

     There are currently no UK or Cayman Island laws, decrees or regulations
which would prevent the remittance of interest or other payments to non-UK
resident holders of the company's bonds or notes.


                                      69
<PAGE>


Material Contracts

     Our material contracts are described under "Information on the
Company--Significant Project Parties."

Documents on Display

     We filed with the SEC a registration statement on Form F-4 under the
Securities Act with respect to the notes (file no. 333-13094) filed on January
24, 2001, which we refer to as the F-4 Registration Statement. This annual
report does not contain all the information included in the F-4 Registration
Statement and the related exhibits and schedules. The F-4 Registration Statement
and the related exhibits and schedules may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of this material may also be
obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. You can obtain information on the
operation of the public reference facilities by calling 1-800-SEC-0330. The SEC
also maintains a site on the World Wide Web (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. Statements made in this
annual report about legal documents may not necessarily be complete and you
should read the documents which are filed as exhibits or schedules or otherwise
filed with the SEC.
     Copies of the indentures for the bonds and the notes and other financing
documents are available for inspection at the specified office of the trustee
and each of the paying agents. We will make available, upon request, to any
beneficial owner of bonds or notes the information required pursuant to Rule
144A(d)(4) under the Securities Act during any period in which we are not
subject to Section 13 or 15(d) of the Exchange Act. Any such request should be
directed to John Turner, AES Drax Energy Limited, 18 Parkshot, Richmond, Surrey
TW9 2RG, United Kingdom, or Joseph C. Brandt, The AES Corporation, 1001 North 19
Street, Arlington, VA 22209, U.S.A. In addition, for so long as the notes are
listed on the Luxembourg Stock Exchange, and the rules of such exchange so
require, copies of the most recent quarterly unaudited and annual audited
financial statements of AES Drax Energy Limited and the guarantor of the notes
will be available at the offices of the Luxembourg Paying Agent.

Item 11. Quantitative and Qualitative Disclosure About Market Risk

Market Risks

     AES Drax is exposed to market risks associated with interest rates, foreign
exchange rates and commodity prices. AES Drax utilizes financial instrument
contracts to hedge against such fluctuations. AES Drax utilizes financial and
commodity derivatives solely for the purpose of hedging exposures to market
risk. AES Drax does not enter into derivative instruments for speculative
purposes.

     Interest Rate Risk

     AES Drax is exposed to risk resulting from changes in interest rates as a
result of the bank debt that was utilized to finance the purchase of the Drax
Power Station. AES Drax's Hedging Policy, under the Eurobonds, is that at least
50% of the senior bank debt ((pound)421.3 million) must be hedged. AES Drax
currently has hedged (pound)565 million of AES Drax Holdings' floating rate
exposure, including through cap and floor agreements to effectively fix or limit
interest rate exposure on the underlying financing. See "Operating and Financial
Review and Prospects-Liquidity and Capital Resources--Repayment of the Bank
Facility and Eurobonds" above. We also refer you to Note 17 of our financial
statements.

     From July 1, 2002 one of the interest rate swaps was refinanced and the
optionality removed from the swap, which will offer a cash benefit by reducing
the principal by 25% and reducing the impact under US GAAP of FAS 133 and its
associated volatility.

     AES Drax Power has entered into a number of interest rate swap transactions
in order to hedge against the impact of interest rate fluctuations on loans
under the Bank Facility. The mark-to-market value (MTM) position on these
interest rate swaps as at March 31, 2003 was an adverse position of
approximately (pound)(88) million.

     The sensitivity of interest payments on the unhedged portion of the
floating rate debt obligations under the Bank Facility is such that if interest
rates were to increase by 100 basis points from January 1, 2003, our semi-annual
floating



                                      70
<PAGE>


rate interest obligation would increase by approximately (pound)4.3 million
(2001: (pound)4 million). Similarly, if the interest payable were to decrease
by 100 basis points, our semi-annual floating rate interest payment obligation
would decrease by (pound)4.3 million (2001: (pound)4 million).

     The actual interest rate payable in respect of the obligations under the
Eurobonds during the period from June 30, 2002 to December 31, 2002 was 7.2313%,
compared to 7.665% during the period from January 1, 2002 to June 30, 2002. The
actual interest rate payable in respect of the period from January 1, 2002 to
June 28, 2002 was 6.33625% and from July 1, 2002 to December 31, 2002 was
6.52875%. However, due to the impact of the downgrades of the Senior Debt by the
various rating agencies over the last few months this rate increased to 6.99%,
from January 1, 2003.

     Foreign Exchange Rate Risk

     AES Drax is exposed to foreign currency risk. A key component of this risk
is that some of AES Drax's monetary obligations as well as those of our
subsidiaries are in US Dollars. Therefore, AES Drax is exposed to changes in the
UK Pound / US Dollar exchange rate. Where possible, AES Drax has attempted to
limit potential foreign exchange exposure by entering into (pound)200 million of
foreign currency swap agreements, to manage AES Drax Holdings' risk related to
these foreign currency fluctuations. The weighted average exchange rate which
underlies these transactions is (pound)1.00 : $1.5128. AES Drax's exposure under
these swaps would only increase our interest rate expense if either the (pound)1
to $1 exchange rate increased to greater then $1.67 : (pound)1.00, or the
6-month GBP LIBOR interest rate increased to approximately 9%. We believe that
the hedging currently in place for the US dollar-denominated senior bonds offers
good protection. See Note 17 to the financial statements.

     AES Drax Holdings has entered into a number of foreign exchange swap
transactions in order to hedge its currency risk relating to making payments of
interest and principal on the US dollar-denominated bonds issued by it. The fair
value or mark-to-market (MTM) position on these currency swaps as at March 31,
2003 was a favorable position of approximately (pound)8 million.

     The fair value of the currency swaps and interest rate swaps disclosed
above are unaudited and have been determined by reference to prices available
from the markets on which these instruments or similar instruments are traded.
Valuations based upon other models or assumptions may yield different results.
The fair value of the swaps disclosed in the financial statements for the years
ended December 31, 2002, 2001 and 2000 as part of the US GAAP reconciliations
have all been audited as part our auditors normal year end procedures.

     AES Drax Energy is required under the indenture in relation to the notes
to have in place currency hedging agreements in respect of scheduled interest
and principal payments in respect of the dollar denominated notes in a
principal amount equal to the excess of the aggregate amount of outstanding
dollar denominated notes over $160 million. AES Drax Energy (or AES Corp. on
its behalf) has previously entered into such currency hedging agreements in
respect of the interest payments in respect of the dollar denominated notes the
last of which expired on February 28 2003.

     AES Drax Energy has not entered into any replacement currency hedging
agreements as required by the terms of the indenture and does not currently
anticipate entering into any such replacement agreements. It is AES Drax
Energy's view that following the downgrading of the notes as a result of the
termination of the Hedging Contract and the impact of such termination on the
cash flow available to AES Drax Energy, it would not be possible to find a
counterparty to any such currency hedging agreement. In addition, AES Drax
Energy has insufficient cash flow or reserves to be able to enter into a swap
mechanism whereby it would pay a counterparty sterling in exchange for dollars
as it has no funds available to meet such financial obligations.

     The failure to comply with this requirement of the indenture is a Default
under the indenture which will become an Event of Default in the event that
such non-compliance continues for a period of 45 days after notice of such
non-compliance has been given to AES Drax Energy by the trustee for the
noteholders or by the holders of at least 25% in aggregate of the Sterling
Equivalent of the principal amount of the notes then outstanding.

     Commodity Price Risk

     Following the termination of the Hedging Contract, AES Drax is fully
exposed to the impact of market fluctuations in the price of electricity. We
have used a hedging strategy, where appropriate, to hedge AES Drax's financial
performance against the effects of fluctuations in electricity commodity prices,
although the tenor of such contracts is currently constrained under the
Standstill Agreement to the period ending December 31, 2003.

     AES Drax has established a commodity risk management group to oversee the
implementation of AES Drax's trading strategy as a merchant power plant. The
risk management group is responsible for the procedures and controls necessary
to minimize the cash flow risks of the AES Drax generating portfolio. The
commodity risk management group intends to manage the Drax Power Station's
commodity pricing and delivery risks with exchange traded instruments and
over-the-counter derivative products, as well as bilateral contracts, within the
limits set by the Finance Obligations. Speculative trading is not permitted
under any circumstances. Risks and exposures shall be reported daily and the
risk control group shall be responsible for monitoring the underlying
assumptions, valuation processes and methodologies in calculating and reporting
commodity value at risk and cash flow at risk.


                                      71
<PAGE>


Item 12. Description of Securities Other Than Equity Securities

     Not applicable.


                                     PART II

Item 13. Defaults, Dividends, Arrearages and Delinquencies

     As discussed under "Information on the Company--Significant Developments
During 2002 and Recent Developments", we are in default under the terms of our
notes, having failed to make the interest payments due of $11,500,000 and
(pound)7,593,750, respectively on the dollar notes and sterling notes due on
February 28, 2003. On May 16, 2003, we received an acceleration notice from the
Holder of our notes, declaring the notes to be immediately due and payable.

     For a description of the defaults under the note indenture, see our Reports
on Form 6-K dated November 19, 2002, December 23, 2002 and February 28, 2003,
each of which is hereby incorporated by reference into this annual report. See
also "Key Information--Risk Factors."

Item 14. Material Modifications to the Rights of Security Holders and Use of
         Proceeds

     The trustee for the notes has provided notice of its resignation pursuant
to the terms of the notes indenture. We are therefore required to appoint a
successor trustee, however, given our inability to service our debt obligations,
we cannot assure you that any successor trustee will accept such appointment.

     See "Key Information--Risk Factors."

Item 15. Controls and Procedures

     Evaluation of disclosure controls and procedures. The President and Plant
Manager and Chief Financial Officer, after evaluating the effectiveness of our
"disclosure controls and procedures" (as defined in rules under the U.S.
Securities Exchange Act) as of a date (the "Evaluation Date") within 90 days of
the filing date of this annual report, have concluded that as of the Evaluation
Date, our disclosure controls and procedures were adequate and effective and
designed to ensure that material information relating to the company and its
consolidated subsidiaries would be made known to them by others within those
entities.

     Changes in internal controls. There were no significant changes in the
company's internal controls or to our knowledge, in other factors that could
significantly affect internal controls subsequent to the Evaluation Date.

Item 16. Reserved


                                      72
<PAGE>


                                    EXHIBITS

Exhibit No.   Document
-----------   --------
  1.1         Articles of Association of AES Drax Energy Limited*

  1.2         Memorandum of Association of AES Drax Energy Limited*

  1.3         Articles of Association of AES Drax Power Finance Holdings
              Limited*

  1.4         Memorandum of Association of AES Drax Power Finance Holdings
              Limited*

  2.1         Indenture, dated as of August 2, 2000 among AES Drax Energy
              Limited, AES Drax Power Finance Holdings and The Bank of New
              York, as Trustee, attaching the form of notation of guarantee*

  2.2         Mortgage Over Shares dated on August 2, 2000*

  2.3         Accounts Charge dated on August 2, 2000*

  2.4         Fixed Charge Over Book Debts dated on August 2, 2000*

  2.5         Intercreditor and Security Trust Deed dated on August 2, 2000*

  2.6         Energy Intercreditor Deed dated on August 2, 2000*

  4.1         Primary Hedge Agreement dated August 18, 1999 between AES Drax
              Power Limited and Eastern Power and Energy Trading Limited*

  4.2         Deed of Amendment of Primary Hedge Agreement, dated February 2001
              between AES Drax Power Limited and TXU Europe Energy Trading
              Limited.****

  4.3         Share Sale and Purchase Agreement, dated as of August 18, 1999
              between AES Drax Limited and National Power plc*

  4.4         Third Supplemental Bond Trust Deed dated as of August 2, 2000
              attaching the form of the modified and restated Bond Trust Deed
              dated as of November 30, 1999*

  7.1         Computation of Ratio of Earnings to Fixed Charges**

  8.1         Subsidiaries of AES Drax Energy Limited*

  10.1        AES Drax Energy Limited Registration Statement on Form F-4 (file
              no. 333-13094) filed on January 24, 2001***

     * Incorporated by reference to the AES Drax Energy Limited Registration
Statement on Form F-4 (file no. 333-13094) filed on January 24, 2001.

     ** Filed herewith.

     *** Incorporated by reference only to the extent of those certain
references in this Annual Report which specifically identify sections of the
AES Drax Energy Limited F-4 Registration Statement as being incorporated by
reference herein.

     **** Incorporated by reference to the AES Drax Energy Limited Form 20-F
for 2000.


                                      73
<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 thereunto duly authorized.

                              AES DRAX ENERGY LIMITED


                              Date: May 20, 2003  By: /s/ Garry Levesley
                                                      --------------------------
                                                      Garry Levesley
                                                      Director


                              Date: May 20, 2003  By: /s/ John Turner
                                                      --------------------------
                                                      John Turner
                                                      Director


                                      74
<PAGE>


     I, Roddy Mackinnon, certify that:


1.   I have reviewed this annual report on Form 20-F of AES Drax Energy Limited;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual
     report;

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
     have:

     a.   designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this annual report
          is being prepared;

     b.   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date
          of this annual report (the "Evaluation Date"); and

     c.   presented in this annual report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent function):

     a.   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b.   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officer and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and
     material weaknesses.

Date: May 20, 2003

                                       /s/ Roddy Mackinnon
                                       -----------------------------------------
                                       Roddy Mackinnon
                                       Chief Financial Officer


                                      75
<PAGE>


     I, Garry Levesley, certify that:


1.   I have reviewed this annual report on Form 20-F of AES Drax Energy
     Limited;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual
     report;

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
     have:

     a.   designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this annual report
          is being prepared;

     b.   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date
          of this annual report (the "Evaluation Date"); and

     c.   presented in this annual report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent function):

     a.   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b.   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officer and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and
     material weaknesses.


Date: May 20, 2003

                                       /s/ Garry Levesley
                                       -----------------------------------------
                                       Garry Levesley
                                       President and Plant Manager


                                      76
<PAGE>


                                    PART III

Item 17.  Financial Statements

This appendix to the annual report contains the audited financial statements of
the following companies:

                                                                           Page
                                                                           ----

A   AES DRAX ENERGY LIMITED

    Report and Financial Statements for the year ended 31 December 2002    A1-34


B   AES DRAX POWER FINANCE HOLDINGS LIMITED

    Report and Financial Statements for the year ended 31 December 2002    B1-26


                                      77
<PAGE>


Company Registration No. 97553



AES DRAX ENERGY LIMITED




Financial Statements

31 December 2002





Deloitte & Touche
Leeds

<PAGE>


AES DRAX ENERGY LIMITED



FINANCIAL STATEMENTS 2002


CONTENTS                                                                   Page

Independent auditors' report                                                 1

Consolidated profit and loss account                                         2

Consolidated statement of total recognised gains and losses                  2

Company profit and loss account                                              3

Company statement of total recognised gains and losses                       3

Consolidated balance sheet                                                   4

Company balance sheet                                                        5

Consolidated cash flow statement                                             6

Company cash flow statement                                                  7

Notes to the accounts                                                        8


<PAGE>



INDEPENDENT AUDITORS' REPORT TO THE DIRECTORS OF AES DRAX ENERGY LIMITED



We have audited the accompanying balance sheets of AES Drax Energy Limited as
of 31 December 2002 and 2001, and the related Profit and Loss accounts,
Statement of total recognised gains and losses and cash flows for the three
years in the period ended 31 December 2002. The profit and loss account for the
three months ended 31 December 2002 and 2001 has not been subject to audit.
These financial statements are the responsibility of the Company's Directors.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom and the United States of America. 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 the
Directors, 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 financial statements present fairly, in all material
respects, the financial position of the Company at 31 December, 2002 and 2001,
and the results of its operations and its cash flows for the years then ended
in conformity with accounting principles generally accepted in the United
Kingdom.

Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected the
determination of net income for each of the three years in the period ended 31
December 2002 and the determination of stockholders' equity and financial
position at 31 December 2002 and 2001, to the extent summarised in Note 29.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the uncertainty as to the outcome of discussions with the
Company's lenders regarding the financial restructuring of the project raises
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.


/s/ Deloitte & Touche

Deloitte & Touche

Chartered Accountants and Registered Auditors

14th May 2003


                                      A-1
<PAGE>

AES DRAX ENERGY LIMITED


CONSOLIDATED PROFIT AND LOSS ACCOUNT
Periods ended 31 December 2002

<TABLE>
                                                    Three months ended                           Year ended
                                                   31 December      31 December   31 December      31 December     31 December
                                                          2002             2001          2002             2001            2000
                                                   (pound)'000      (pound)'000   (pound)'000      (pound)'000     (pound)'000
                                                    Unaudited        Unaudited

<S>                                      <C>           <C>             <C>            <C>              <C>             <C>
TURNOVER - continuing operations         2             137,661         143,465        524,831          586,103         622,776

Cost of sales                                          (69,603)        (59,115)      (219,462)        (267,204)       (278,218)
                                                     ---------       ---------     ----------        ---------       ---------

GROSS PROFIT                                            68,058          84,350        305,369          318,899         344,558

Administrative expenses - normal                       (46,826)        (54,062)      (178,967)        (176,162)       (171,017)
                        - exceptional    4            (715,801)              -       (715,801)               -               -
                                                     ---------       ---------     ----------        ---------       ---------
                                                      (762,627)        (54,062)      (894,768)        (176,162)       (171,017)
                                                     ---------       ---------     ----------        ---------       ---------

OPERATING (LOSS) / PROFIT - continuing   3            (694,569)         30,288       (589,399)         142,737         173,541
  operations

Interest receivable and other income     5               5,748           3,581         23,824           16,204          12,890

Interest payable and similar charges     6             (50,558)        (51,302)      (206,387)        (197,611)       (177,787)
                                                     ---------       ---------     ----------        ---------       ---------

(LOSS) / PROFIT ON ORDINARY ACTIVITIES
  BEFORE TAXATION                                     (739,379)        (17,433)      (771,962)         (38,670)          8,644

Tax on (loss) / profit on ordinary       7               9,634          (2,371)           510          (10,886)        (22,435)
  activities
                                                     ---------       ---------     ----------        ---------       ---------

RETAINED LOSS FOR THE FINANCIAL
  PERIOD / YEAR TRANSFERRED FROM
  RESERVES                              20            (729,745)        (19,804)      (771,452)         (49,556)        (13,791)
                                                     =========       =========     ==========        =========       =========
</TABLE>

STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

There are no recognised gains and losses for the current or preceding financial
period other than as stated in the profit and loss account. Therefore, no
statement of total recognised gains and losses has been presented.


                                      A-2
<PAGE>


AES DRAX ENERGY LIMITED


COMPANY PROFIT AND LOSS ACCOUNT
Periods ended 31 December 2002

<TABLE>
                                                   Three months ended                          Year ended
                                               31 December      31 December     31 December      31 December      31 December
                                                      2002             2001            2002             2001             2000
                                               (pound)'000      (pound)'000     (pound)'000      (pound)'000      (pound)'000
                                                   Unaudited        Unaudited

<S>                                                    <C>               <C>          <C>                <C>             <C>
TURNOVER - continuing operations                           -                -              -               -                -

Cost of sales                                              -                -              -               -                -
                                                   ---------        ---------      ---------       ---------        ---------

GROSS PROFIT                                               -                -              -               -                -

Administrative income / (expenses)                     2,791             (304)        10,508             386             (287)
                                                   ---------        ---------      ---------       ---------        ---------

OPERATING PROFIT / (LOSS) - continuing
  operations                            3              2,791             (304)        10,508             386             (287)


Interest receivable and other income    5                  -              206            268           1,254              363

Interest payable and similar charges    6             (7,614)          (7,614)       (30,944)        (30,673)         (12,275)
                                                   ---------        ---------      ---------       ---------        ---------

LOSS ON ORDINARY ACTIVITIES BEFORE
  TAXATION                                            (4,823)          (7,712)       (20,168)        (29,033)         (12,199)

Tax on loss on ordinary activities      7                  -                -              -               -                -
                                                   ---------        ---------      ---------       ---------        ---------

RETAINED LOSS FOR THE FINANCIAL
  PERIOD / YEAR TRANSFERRED FROM
  RESERVES                             20             (4,823)          (7,712)       (20,168)        (29,033)         (12,199)
                                                   =========        =========      =========       =========        =========
</TABLE>

COMPANY STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

There are no recognised gains and losses for the current or preceding financial
period other than as stated in the profit and loss account, therefore no
statement of total recognised gains and losses has been presented.


                                      A-3
<PAGE>


AES DRAX ENERGY LIMITED


CONSOLIDATED BALANCE SHEET
31 December 2002

<TABLE>
                                                      Note          2002           2001
                                                             (pound)'000    (pound)'000

<S>                                                    <C>     <C>            <C>
FIXED ASSETS
Intangible assets                                      8               -        594,610
Tangible assets                                        9       1,083,118      1,140,245
                                                              ----------     ----------
                                                               1,083,118      1,734,855
                                                              ----------     ----------

CURRENT ASSETS
Stocks                                                11          31,327         62,563
Debtors                                               12         880,335        964,349
Cash at bank and in hand                              13          85,081         64,554
                                                              ----------     ----------
                                                                 996,743      1,091,466

CREDITORS: amounts falling due within one year        14        (138,997)      (102,714)
                                                              ----------     ----------

NET CURRENT ASSETS                                               857,746        988,752
                                                              ----------     ----------

TOTAL ASSETS LESS CURRENT LIABILITIES                          1,940,864      2,723,607

CREDITORS: amounts falling due after more
  than one year                                       15      (2,387,642)    (2,587,423)

PROVISIONS FOR LIABILITIES AND CHARGES                18         (16,878)       (17,388)
                                                              ----------     ----------
                                                                (463,656)       118,796
                                                              ==========     ==========

CAPITAL AND RESERVES
Called up share capital                               19         172,000        172,000
Profit and loss account                               20        (635,656)       (53,204)
                                                              ----------     ----------
TOTAL EQUITY SHAREHOLDERS' DEFICIT                              (463,656)       118,796
                                                              ==========     ==========
</TABLE>

These financial statements were approved by the Board of Directors on May 14,
2003.

Signed on behalf of the Board of Directors



Garry Levesley
---------------------
Director


                                      A-4
<PAGE>

AES DRAX ENERGY LIMITED


COMPANY BALANCE SHEET
31 December 2002

<TABLE>
                                                              Note           2002             2001
                                                                      (pound)'000      (pound)'000
<S>                                                            <C>        <C>              <C>
FIXED ASSETS
Investments                                                    10         224,000          224,000
                                                                        ---------        ---------
                                                                          224,000          224,000
                                                                        ---------        ---------

CURRENT ASSETS
Debtors                                                        12         234,387          234,936
Cash at bank and in hand                                       13              56           23,466
                                                                        ---------        ---------
                                                                          234,443          258,402

CREDITORS: amounts falling due within one year                 14         (17,069)         (10,355)
                                                                        ---------        ---------

NET CURRENT ASSETS                                                        217,374          248,047
                                                                        ---------        ---------

TOTAL ASSETS LESS CURRENT LIABILITIES                                     441,374          472,047

CREDITORS: amounts falling due after more than one year        15        (330,774)        (341,279)
                                                                        ---------        ---------
                                                                          110,600          130,768
                                                                        =========        =========

CAPITAL AND RESERVES
Called up share capital                                        19         172,000          172,000
Profit and loss account                                        20         (61,400)         (41,232)
                                                                        ---------        ---------

TOTAL EQUITY SHAREHOLDERS' FUNDS                                          110,600          130,768
                                                                        =========        =========

</TABLE>

These financial statements were approved by the Board of Directors on May 14,
2003.

Signed on behalf of the Board of Directors



Garry Levesley
----------------------
Director


                                      A-5
<PAGE>

AES DRAX ENERGY LIMITED


CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 December 2002


<TABLE>
                                                               Note           2002          2001           2000
                                                                       (pound)'000   (pound)'000    (pound)'000


<S>                                                              <C>       <C>           <C>            <C>
Net cash inflow from operating activities                        22        177,947       241,180        154,626

Returns on investments and servicing of finance
Interest received                                                           23,769        16,211         12,563
Interest paid                                                            (175,617)      (210,871)      (154,375)
                                                                         --------       --------       --------
                                                                         (151,848)      (194,660)      (141,812)
                                                                         --------       --------       --------

Taxation                                                                     (348)        (9,161)       (19,238)

Capital expenditure
Payments to acquire tangible fixed assets                                  (5,224)        (6,119)       (11,993)
Receipts from sale of tangible fixed assets                                     -             29          5,500
                                                                         --------       --------       --------
                                                                           (5,224)        (6,090)        (6,493)
                                                                         --------       --------       --------

Cash inflow before use of liquid resources and financing                    20,527         31,269       (12,917)

Management of liquid resources
Increase in restricted cash deposits                                      (19,087)        (1,255)       (24,476)

Financing
Repurchase of share capital                                                     -        (38,000)       (14,000)
Prepayment of coupons                                                           -              -       (373,551)
Repayment of borrowings                                                         -              -       (250,000)
New borrowings                                                                  -              -        668,059
                                                                         --------       --------       --------

Increase / (decrease) in cash in the year                     23,24         1,440         (7,986)        (6,885)
                                                                         ========       ========       ========
</TABLE>


                                      A-6
<PAGE>

AES DRAX ENERGY LIMITED


COMPANY CASH FLOW STATEMENT
Year ended 31 December 2002

<TABLE>
                                                                  Note         2002             2001              2000
                                                                        (pound)'000      (pound)'000       (pound)'000
<S>                                                                <C>      <C>               <C>           <C>
Net cash inflow from operating activities                          22         7,266            4,090         (238,724)

Returns on investments and servicing of finance
Interest received                                                               268            1,254              363
Interest paid                                                               (30,944)         (32,796)               -
                                                                        -----------      -----------      -----------
                                                                            (30,676)         (31,542)             363
                                                                        -----------      -----------      -----------
Cash outflow before use of liquid resources and financing                   (23,410)         (27,452)        (238,361)

Management of liquid resources
Decrease / (increase) in restricted cash deposits                            16,014             (806)         (15,231)

Financing
Repurchase of share capital                                                       -          (38,000)         (14,000)
New borrowings                                                                    -           73,220          268,059
                                                                        -----------      -----------      -----------
(Decrease) / increase in cash in the year                       23,24        (7,396)           6,962              467
                                                                        ===========      ===========      ===========
</TABLE>


                                      A-7
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


1.   ACCOUNTING POLICIES

     The financial statements are prepared in accordance with applicable UK
     accounting standards. The particular accounting policies adopted are
     described below.

     Basis of preparation of financial statements

     Following the termination of the Hedging Contract with TXU and the
     appointment of joint administrators for TXU Energy and TXU Europe on
     November 18 and 19, 2002, respectively, the company entered discussions
     with its senior lenders in order to address the potential defaults under
     the senior financing documents arising from the TXU situation.

     In addition, certain of the forward looking debt service cover ratios at
     June 30, 2002, were below the threshold required to permit distributions.
     As a result, AES Drax Power was not permitted to make distributions to AES
     Drax Energy to permit interest due on the high yield notes to be paid on
     August 30, 2002. The AES Corporation, however, made a contribution to AES
     Drax Energy which together with amounts then held in the high yield note
     debt service reserve account was sufficient to make the payments then due.
     At the time the AES Corporation stated that there were no assurances that
     it would agree to make any similar payments in the future. Any improvement
     in the forward looking ratios were dependent on a favourable change in the
     forward curve for electricity prices during the period from June 30 to
     December 31, 2002. Such improvements did not occur and the ratios were
     below 1.19:1 at December 31, 2002.

     Moreover, there are insufficient funds remaining in the high yield note
     debt service reserve account to cover such payments. AES Drax Energy was
     unable to pay the interest due on the notes on time at the end of February
     2003. Such failure constitutes an event of default under the notes,
     although any enforcement rights are subject to a 90-day grace period as
     well as the terms and conditions of certain intercreditor arrangements.

     On December 13, 2002, AES Drax signed an agreement regarding certain
     standstill arrangements with the steering committee representing the bank
     lenders and an ad hoc committee formed by holders of the senior bonds. The
     purpose of the standstill is to provide AES Drax and the senior creditors
     with a period of stability during which discussions regarding consensual
     restructuring of AES Drax can take place. The standstill period will
     expire on May 31, 2003, unless extended. The bank lenders and the senior
     bondholders have agreed to waive certain events of default under the
     Eurobonds or the senior bonds, as applicable, not to accelerate payment of
     the obligations and would not seek to enforce security during the
     standstill period.

     Under the Standstill Agreement, AES Drax's bank lenders and senior
     bondholders have agreed to certain amendments and waivers to their
     respective financing documents which permits AES Drax to have access to at
     least (pound)30,000,000 of funds currently unavailable under the financing
     documentation. These funds, subject to certain consent rights of the
     steering committee of the bank lenders and the ad hoc committee of senior
     bondholders, are available to provide credit support to electricity
     counterparties and suppliers and for working capital needs.

     Failure to effect a satisfactory restructuring of AES Drax could lead to
     an event of default under the senior financing documents and the
     withdrawal of support by the Company's lenders.

     The Directors believe that the standstill agreement will facilitate an
     agreed restructuring of AES Drax. On this basis, the Directors consider it
     appropriate to prepare the financial statements on the going concern
     basis. The financial statements do not include any adjustments that would
     result from a withdrawal of support by the Company's lenders.

     Accounting convention

     The financial statements are prepared under the historical cost
     convention.


                                      A-8
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

1.   ACCOUNTING POLICIES (continued)

     Basis of consolidation

     The group consolidates the financial statements of the company and all of
     its subsidiary undertakings up to 31 December 2002.

     Intangible fixed assets

     Goodwill represents the excess of the fair value of the consideration
     given over the fair value of the identifiable net assets acquired.
     Acquired goodwill is capitalised and amortised over 20 years.

     Tangible fixed assets

     Freehold land and assets in the course of construction are not
     depreciated. Depreciation is provided on cost in equal annual instalments
     over the estimated useful lives of the assets. The estimated useful lives
     are:

     Freehold buildings, plant and machinery         30-40 years
     Fixtures and fittings                           3-5 years

     Stocks

     Stocks are stated at the lower of cost, inclusive of appropriate
     overheads, and net realisable value. Net realisable value is based on
     estimated selling price less all further costs to completion and all
     relevant marketing, selling and distribution costs.

     Deferred taxation

     Deferred taxation is provided in full on timing differences that result in
     an obligation at the balance sheet date to pay more tax, or a right to pay
     less tax, at a future date, at rates expected to apply when they
     crystallise based on current tax rates and law. Timing differences arise
     from the inclusion of items of income and expenditure in taxation
     computations in periods different from those in which they are included in
     the financial statements.

     Deferred tax assets are recognised to the extent that it is regarded as
     more likely than not that they will be recovered. Deferred tax assets and
     liabilities are not discounted.

     FRS 19 'Deferred Tax' has been adopted in the year and has not resulted in
     any change to comparative figures.

     Leased assets

     Operating lease rentals are charged to income in equal annual amounts over
     the lease term.

     Revenue recognition

     Revenues from the sale of electricity are recorded based upon output
     delivered and capacity provided at rates specified under contract terms or
     prevailing market rates.

     Deferred Finance Costs

     Financing costs are deferred and amortised over the related financing
     period using the effective interest method of amortisation. Deferred
     financing costs are shown net of accumulated amortisation of (pound)16.8
     million and (pound)10.8 million as of 31 December 2002 and 31 December
     2001, respectively.


                                      A-9
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


1    ACCOUNTING POLICIES (continued)

     Derivatives

     The group enters into various derivative transactions in order to hedge
     their exposure to certain market risks. The group currently has
     outstanding interest rate swap, cap and floor agreements that hedge
     against interest rate exposure on floating rate debt. Interest swaps, caps
     and floors are accounted for by adjusting the interest rate cost on the
     floating rate debt.

     Pension costs

     Pension contributions are charged to the profit and loss account so as to
     spread the cost of pensions over employees' working lives. The regular
     cost is attributed to individual years using the projected unit credit
     method. Variations in pension costs, which are identified as a result of
     actuarial valuations, are amortised over the average expected remaining
     working lives of employees. Differences between the amounts funded and the
     amounts charged to the profit and loss account are treated as either
     provisions or a prepayment in the balance sheet.

     Use of estimates

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires the company to make estimates and
     assumptions that affect reported amounts of assets and liabilities and
     disclosures of contingent assets and liabilities at the date of the
     financial statements, as well as the reported amounts of revenues and
     expenses during the reporting period. Actual results could differ from
     those estimates.

2.   TURNOVER

     Turnover comprises primarily sales to the electricity trading market in
     England and Wales of electricity generated by the group. Most of the power
     plant's revenue relies primarily on sales contracts with a few large
     customers. One customer accounted for 65.1% of revenues in the year to 31
     December 2002. Two customers accounted for 67.9% and 9.0% of revenues in
     2001.

3.   OPERATING PROFIT / (LOSS)

<TABLE>
                                                          Group                                      Company
                                        Year ended     Year ended       Year ended    Year ended    Year ended     Year ended
                                       31 December    31 December      31 December   31 December   31 December    31 December
                                              2002           2001             2000          2002          2001           2000
                                       (pound)'000    (pound)'000      (pound)'000   (pound)'000   (pound)'000    (pound)'000
<S>                                         <C>            <C>              <C>           <C>           <C>            <C>
       Operating profit / (loss) is
         after charging / (crediting):
       Depreciation of owned assets         32,854         32,503           31,937             -             -              -
       Amortisation of goodwill             33,876         33,876           33,876             -             -              -
       Utilisation of unfavourable
         contract provision                      -        (17,789)         (25,188)            -             -              -
       Amortisation of deferred              5,947          6,031            4,606           548           501              1
         financing costs
       Exchange (gain) / loss on US
         dollar bonds                      (10,505)         4,720              286       (10,505)        4,720            286
                                          ========       ========         ========      ========      ========       ========
</TABLE>


                                     A-10
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


4.   EXCEPTIONAL ITEMS

                                   Year ended        Year ended      Year ended
                                  31 December       31 December     31 December
                                         2002              2001            2000
                                  (pound)'000       (pound)'000     (pound)'000

     Bad debt expense                 136,801                -               -
     Impairment loss (note 8 & 9)     579,000                -               -
                                    ---------        ---------       ---------
                                      715,801                -               -
                                    =========        =========       =========

     On 14 October 2002, TXU Corp withdrew financial support for its subsidiary
     TXU Europe Group plc ("TXU Europe"). As a consequence of this, on 18
     November 2002, the Company terminated the Hedging Contract with TXU Europe
     Energy Trading Limited ("TXU Energy"), a subsidiary of TXU Europe, to
     minimise financial exposure. On 19 November 2002, TXU Europe filed a
     petition on behalf of itself, TXU U.K Ltd and TXU Energy, seeking
     protection from its creditors, which was approved, putting the three
     companies into temporary administration. As a result, the Company has made
     100% provision against all amounts owed by TXU Energy in respect of the
     Hedging Contract and the termination of that contract, as at 18 November
     2002.

     Also included within administrative expenses is an exceptional item of
     (pound)579 million in respect of an impairment loss on goodwill and fixed
     assets. The impairment loss was measured by reference to the value in use
     of the assets using a discount rate of 7.9% which reflects the risks
     inherent in the forecast cash flows.

     The tax effect of the bad debt expense is (pound)41 million. The
     impairment of goodwill and fixed assets is non-deductible and so has no
     tax effect.

5.   INTEREST RECEIVABLE AND SIMILAR INCOME

<TABLE>
                                                   Group                                          Company
                                   Year ended      Year ended      Year ended      Year ended      Year ended      Year ended
                                  31 December     31 December     31 December     31 December     31 December     31 December
                                         2002            2001            2000            2002            2001            2000
                                  (pound)'000     (pound)'000     (pound)'000     (pound)'000     (pound)'000     (pound)'000

<S>                                    <C>             <C>             <C>                <C>           <C>               <C>
     Bank interest receivable          23,824          16,204          12,890             268           1,254             363
                                    =========       =========       =========       =========       =========       =========
</TABLE>

6.   INTEREST PAYABLE AND SIMILAR CHARGES

<TABLE>
                                                   Group                                          Company
                                   Year ended      Year ended      Year ended      Year ended      Year ended      Year ended
                                  31 December     31 December     31 December     31 December     31 December     31 December
                                         2002            2001            2000            2002            2001            2000
                                  (pound)'000     (pound)'000     (pound)'000     (pound)'000     (pound)'000     (pound)'000

<S>                                   <C>             <C>             <C>              <C>             <C>             <C>
     Bank and other loans             206,387         197,611         177,787          30,944          30,673          12,275
                                   ==========      ==========      ==========      ==========      ==========      ==========
</TABLE>


                                     A-11
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


7.   TAX ON (LOSS) / PROFIT ON ORDINARY ACTIVITIES
     a) Analysis of charge in the year

<TABLE>
                                                                                      Group
                                                                      Year ended     Year ended      Year ended
                                                                     31 December    31 December     31 December
                                                                            2002           2001            2000
                                                                     (pound)'000    (pound)'000     (pound)'000
<S>                                                                         <C>           <C>             <C>
     United Kingdom corporation tax at 30%
                            - current year                                     -          4,643          13,970
                            - prior year                                       -             35             458
                                                                         -------        -------         -------

                                                                               -          4,678          14,428

     Deferred tax - Timing differences, origination and reversal            (662)         6,208           7,953
                  - Adjustment in respect of prior years                     152              -              54
                                                                         -------        -------         -------
                                                                            (510)         6,208           8,007
                                                                         -------        -------         -------
                                                                            (510)        10,886          22,435
                                                                         =======        =======         =======
</TABLE>

<TABLE>
                                                                                       Company
                                                                      Year ended     Year ended      Year ended
                                                                     31 December    31 December     31 December
                                                                            2002           2001            2000
                                                                     (pound)'000    (pound)'000     (pound)'000

<S>                                                                         <C>           <C>             <C>
       United Kingdom corporation tax at 30%
                              - current year                                   -              -               -
                              - prior year                                     -              -               -
                                                                         -------        -------         -------

                                                                               -              -               -
       Deferred tax - Timing differences, origination and reversal             -              -               -
                    - Adjustment in respect of prior years                     -              -               -
                                                                         -------        -------         -------
                                                                               -              -               -
                                                                         -------        -------         -------
                                                                               -              -               -
                                                                         =======        =======         =======
</TABLE>


                                     A-12
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


7.   TAX ON (LOSS) / PROFIT ON ORDINARY ACTIVITIES (continued)
     b) Factors affecting tax charge for the current year

     The tax assessed for the period is higher than that resulting from applying
     the standard rate of corporation tax in the UK (30%) (2001: 30%). The
     differences are explained below:

<TABLE>
                                                                                       Group
                                                                       Year ended      Year ended       Year ended
                                                                      31 December     31 December      31 December
                                                                             2002            2001             2000
                                                                      (pound)'000     (pound)'000      (pound)'000

     (Loss) / profit on ordinary activities before tax                   (771,962)        (38,670)           8,644
                                                                        =========       =========        =========

<S>  <C>                                                                 <C>              <C>             <C>
     Tax on profit on ordinary activities at 30% (2001 & 2000:           (231,589)        (11,601)           2,593
       30%)
     Effects of:
     Expenses not deductible for tax purposes                             214,452          22,068           19,330
     Capital allowances in excess of depreciation                             662          (6,208)          (7,953)
     Tax losses not ultilised                                              16,475             384                -
     Adjustment in respect of prior years                                       -              35              458
                                                                        ---------       ---------        ---------
     Current tax charge for the year                                            -           4,678           14,428
                                                                        =========       =========        =========
</TABLE>

<TABLE>
                                                                                       Company
                                                                       Year ended      Year ended        Year ended
                                                                      31 December     31 December       31 December
                                                                             2002            2001              2000
                                                                      (pound)'000     (pound)'000       (pound)'000

<S>                                                                       <C>             <C>              <C>
     (Loss) / profit on ordinary activities before tax                    (20,168)        (29,033)         (12,199)
                                                                        =========       =========        =========
     Tax on profit on ordinary activities at 30% (2001 & 2000:             (6,050)         (8,710)          (3,660)
       30%)
     Effects of:
     Expenses not deductible for tax purposes                               5,884           8,710            3,660
     Capital allowances in excess of depreciation                               -               -                -
     Tax losses not ultilised                                                 166               -                -
     Adjustment in respect of prior years                                       -               -                -
                                                                        ---------       ---------        ---------
     Current tax charge for the year                                            -               -                -
                                                                        =========       =========        =========
</TABLE>


                                     A-13
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


8.   INTANGIBLE FIXED ASSETS

     The intangible fixed assets comprise of goodwill which arose on the
     acquisition of AES Drax Power Limited.

                                                                      Goodwill
                                                                   (pound)'000
     Cost
     At 1 January 2002                                                 665,185
     Reclassification                                                  (11,206)
                                                                      --------
     At 31 December 2002                                               653,979
                                                                      ========

     Amortisation
     At 1 January 2002                                                  70,575
     Charge for the year                                                33,876
     Impairment (note 4)                                               549,528
                                                                      --------
     At 31 December 2002                                               653,979
                                                                      ========

     Net book value
     At 31 December 2002                                                     -
                                                                      ========
     At 31 December 2001                                               594,610
                                                                      ========

9.   TANGIBLE FIXED ASSETS

<TABLE>
                                                             Plant,
                                           Freehold      machinery,
                                           land and      fixtures &
                                          buildings        fittings    Plant spares            Total
                                        (pound)'000     (pound)'000     (pound)'000      (pound)'000
<S>  <C>                                    <C>           <C>                <C>          <C>
     Cost
     At 1 January 2002                      132,181       1,081,136          21,011       1,234,328
     Additions                                    -           2,794           2,430           5,224
     Disposals                                    -          (2,414)              -          (2,414)
     Issues                                       -               -             (24)            (24)
                                          ---------       ---------       ---------       ---------
     At 31 December 2002                    132,181       1,081,516          23,417       1,237,114
                                          ---------       ---------       ---------       ---------

     Accumulated depreciation
     At 1 January 2002                        9,735          83,342           1,006          94,083
     Charge for the year                      3,209          29,143             502          32,854
     Disposals                                    -          (2,413)              -          (2,413)
     Impairment (note 4)                          -          29,472               -          29,472
                                          ---------       ---------       ---------       ---------
     At 31 December 2002                     12,944         139,544           1,508         153,996
                                          ---------       ---------       ---------       ---------

     Net book value
     At 31 December 2002                    119,237         941,972          21,909       1,083,118
                                          =========       =========       =========       =========
     At 31 December 2001                    122,446         997,794          20,005       1,140,245
                                          =========       =========       =========       =========
</TABLE>

     Freehold land amounting to(pound)1,060,000 (2001:(pound)1,060,000) has not
     been depreciated.

     The company does not hold any tangible fixed assets.


                                     A-14
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


10.  INVESTMENTS HELD AS FIXED ASSETS

                                                               Interests
                                                                      in
                                                              subsidiary
     Company                                                undertakings
                                                             (pound)'000

     Cost
     At 1 January 2002 and 31 December 2002                      224,000
                                                               =========

     Details of the investments in which the group or the company held more
     than 10% of the nominal value of any class of share capital as at 31
     December 2002 were as follows:

<TABLE>
     Name of company                       Country of        Type of      Proportion     Proportion      Nature of
                                         Registration         shares       of voting      of shares       business
                                                                         rights held           held
<S>                                  <C>                      <C>                <C>           <C>         <C>
     AES Drax Energy II Limited      England & Wales          Ordinary           100%          100%        Parent
     AES Drax Power Finance Limited  England & Wales          Ordinary            99%           99%        Parent
</TABLE>

11.  STOCKS

<TABLE>
                                                                Group                         Company
                                                             2002           2001            2002            2001
                                                      (pound)'000    (pound)'000     (pound)'000     (pound)'000
<S>                                                     <C>            <C>             <C>             <C>
     Raw materials and consumables                         31,327         62,563               -               -
                                                        =========      =========       =========       =========
</TABLE>

12.  DEBTORS

<TABLE>
                                                                  Group                         Company
                                                               2002           2001             2002           2001
                                                        (pound)'000    (pound)'000      (pound)'000    (pound)'000
<S>                                                          <C>           <C>           <C>             <C>
       Amounts due within one year
       Trade debtors                                         52,462        104,849                -              -
       Amounts owed by immediate parent                         403            403                -              -
       Amounts owed by subsidiary undertaking                     -              -          230,229        230,229
       Prepayments and other debtors                        827,470        859,097            4,158          4,707
                                                          ---------      ---------       ----------      ---------
                                                            880,335        964,349          234,387        234,936
                                                          =========      =========       ==========      =========

       Amounts due after one year included above
       Other debtors                                        425,000        425,000                -              -
                                                          =========      =========       ==========      =========
</TABLE>

     Other debtors due after one year, for the Group, relate to the forward
     purchase of shares in AES Drax Holdings Limited. The shares will be
     purchased by AES Drax Acquisition Limited when the senior secured debt is
     repaid in 2015.

     Included within other debtors is a coupon prepayment to Inpower
     of(pound)345.8 million (2001:(pound)360.3 million), VAT receivable of
     (pound)Nil (2001:(pound)1.8 million), deferred financing costs
     of(pound)42.2 million (2001:(pound)48.2 million), a swap advance debtor
     of(pound)1.4 million (2001: swap advance creditor(pound)23.5 million) and
     an insurance debtor of(pound)0.2 million (2001:(pound)0.5 million).


                                     A-15
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


13.  CASH AT BANK AND IN HAND

     Included within the total cash balance of the group are restricted cash
     deposits amounting to (pound)44,818,000 (2001: (pound)25,731,000).
     Included within the total cash balance of the company are restricted cash
     deposits amounting to (pound)23,000 (2001: (pound)16,037,000). These
     comprise part of a required balance which needs to be in place on each
     repayment date.

14.  CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
                                                                  Group                         Company
                                                             2002           2001             2002           2001
                                                      (pound)'000    (pound)'000      (pound)'000    (pound)'000

<S>                                                        <C>            <C>              <C>            <C>
     Trade creditors                                       15,222          2,679                -              -
     Amounts owed to fellow subsidiary                      1,410            824              133            128
     Amounts owed to ultimate parent                       66,401          5,200            6,784             75
     Corporation tax                                        1,204          1,556                -              -
     Other creditors and accruals                          54,760         92,455           10,152         10,152
                                                         --------       --------         --------       --------
                                                          138,997        102,714           17,069         10,355
                                                         ========       ========         ========       ========
</TABLE>

     Included within other creditors is VAT payable of(pound)9.8 million
     (2001:(pound)28.2 million) and accrued interest of(pound)40.9 million
     (2001:(pound)10.1 million).

15.  CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

<TABLE>
                                                               Group                          Company
                                                             2002           2001            2002            2001
                                                      (pound)'000    (pound)'000     (pound)'000     (pound)'000

<S>                                                     <C>            <C>               <C>             <C>
     Other loans (note 16)                              2,387,274      2,397,779         262,274         272,779
     Amounts owed to fellow subsidiaries                        -        189,000          68,500          68,500
     Retentions                                               368            644               -               -
                                                        ---------      ---------        --------        --------
                                                        2,387,642      2,587,423         330,774         341,279
                                                        =========      =========        ========        ========
</TABLE>

     Amounts owed to fellow subsidiaries have no fixed repayment dates, however
     the directors have indicated that payments will not be requested within
     one year. No interest is payable on these amounts.

     All retentions are payable within 1 to 2 years.

16.  BORROWINGS

     On 2 August 2000, AES Drax Energy Limited issued (pound)135 million 11.25%
     senior secured notes due 2010 and $200 million senior secured notes due
     2010. The net proceeds from the offering of (pound)267 million were used
     to pay certain fees and expenses and to repay the senior secured debt. The
     terms of the notes require the maintenance of certain reserves and include
     limitations on incurring additional debt and on the payment of dividends
     to stockholders.

     The other borrowings at 31 December 2002 consist of Guaranteed Secured
     Bonds. There are two tranches of bonds, the Original Bonds issued on 30
     November, 1999 to finance the acquisition of Drax Power Station by AES and
     a second tranche issued on August 2, 2000, the proceeds from which were
     used to prepay (pound)370 million of interest and the remainder for
     general corporate purposes. The Original Bonds are guaranteed on an
     unlimited, unconditional and irrevocable basis by each of AES Drax Power
     Limited, AES Drax Acquisition Limited, AES Drax Holdings Limited, AES Drax
     Financing Limited and AES Drax Limited and each such entity has granted
     security over all their assets as security for, inter alia, the Original
     Bonds and certain related swaps, finance documents and guarantees. The New
     Bonds are guaranteed on an


                                      A-16
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


16.  BORROWINGS (continued)

     unlimited, unconditional and irrevocable basis by each of AES Drax Power
     Limited, AES Drax Acquisition Limited, AES Drax Holdings Limited, AES Drax
     Financing Limited, AES Drax Limited and AES Drax Electric Limited and each
     such entity has granted security over all their assets as security for,
     inter alia, the New Bonds and certain related swaps, finance documents and
     guarantees.

     Repayment of all of the Guaranteed Secured Bonds is further secured by
     direct agreements from certain of the major project parties and other
     security arrangements.

     The Original Bonds bear a fixed rate of interest of 8.86% and interest is
     payable semi-annually over fifteen years. The New Bonds comprise of
     $302,400,000 of 10.41% senior secured bonds and (pound)200,000,000 of
     9.07% senior secured bonds, maturing on December 31, 2020 and December 31,
     2025 respectively. Interest on the New Bonds is payable semi-annually
     commencing December 31, 2000 for 20 years on the dollar bonds and 25 years
     on the sterling bonds.

<TABLE>
                                                                Group                         Company
                                                             2002           2001             2002           2001
                                                      (pound)'000    (pound)'000      (pound)'000    (pound)'000
<S>                                                       <C>            <C>              <C>            <C>
     Analysis of loan repayments are:
     After five years
     Original Bonds                                     1,725,000      1,725,000                -              -
     New Bonds                                            400,000        400,000                -              -
     Senior Secured Notes                                 262,274        272,779          262,274        272,779
                                                        ---------      ---------        ---------      ---------
                                                        2,387,274      2,397,779          262,274        272,779
                                                        =========      =========        =========      =========
</TABLE>

17.  DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS

     The group issues or holds financial instruments for two purposes.

     o Financial instruments relating to the operations, financing and risks of
     the operating company, AES Drax Power Limited.

     o Financial instruments relating to the financing and risks of the debt
     holding companies AES Drax Holdings Limited and AES Drax Energy Limited
     ("the Company"), and the consolidated risks of the Group.

     The Group finances its operations by a mix of retained profits, senior
     secured bank debt and senior secured bonds. The Group's financial
     instruments comprise borrowings, cash and liquid resources, items that
     arise directly from its operations and derivative transactions. The main
     risks arising from the Group's financial instruments are interest rate
     risk, currency risk and liquidity risk.

     Interest Rate Risk

     The Group is partly financed by borrowings at both fixed and floating
     rates of interest.

     The Original Bonds require that we enter into hedges against interest rate
     fluctuations on a two-year rolling basis in an amount equal to at least
     50% of the principal amount of the loans under the Bank Facility. The
     interest amounts due with respect to the remaining principal are thus
     subject to fluctuations in the London interbank offered rate (LIBOR). We
     currently have hedged (pound)565 million of our floating rate exposure and
     such hedging arrangements satisfy the requirements under the Original
     Bonds.

     For the New Bonds, we currently have (pound)132 million of floating rate
     exposure. For the Notes issued by the Company we have no floating rate
     exposure.


                                     A-17
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

17.  DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)

     Currency Risk

     The Group is partly financed by borrowings in US Dollars. The Group also
     holds certain US Dollar denominated bank accounts.

     The Group has eliminated the currency risk via cross-currency swaps for
     the $302,400,000 New Bonds issued by AES Drax Holdings Limited in August
     2000. At 31 December 2002, currency swaps covered 100% (2001: 100%) of the
     nominal amount of the US Dollar borrowings and 100% of the interest cost
     of these borrowings (2001: 100%).

     The Group has partially eliminated the currency risk via cross-currency
     swaps for $200,000,000 of Notes issued by AES Drax Energy Limited in
     August 2000. At 31 December 2002, currency swaps covered Nil% (2001: 20%)
     of the nominal amount of the US Dollar borrowings.

     There are no material currency risks in the operating company, AES Drax
     Power Limited.

     Liquidity Risk

     The Group requires access to sufficient liquidity to enable it to meet its
     obligations as they fall due and to provide adequately for contingencies.

     For the operating company, AES Drax Power Limited, short-term liquidity is
     provided by a committed bank facility of (pound)15 million (2001:
     (pound)15 million).

     For AES Drax Holdings Limited, short-term liquidity is provided by a
     (pound)52 million letter of credit from Goldman Sachs, which comprises
     part of the Required Balance on the Debt Service Account as stated in the
     Facility Agreement with the senior banks. The cash balance on these Debt
     Service Accounts at 31 December 2002 totalled (pound)44.8 million (2001:
     (pound)9.7 million).

     For AES Drax Energy Limited, short-term liquidity is provided by Debt
     Service Accounts. The cash balance on these Debt Service Accounts at 31
     December 2002 totalled (pound)23,000 (2000: (pound)16,037,000).

     The Generation Business

     Hedging

     The operating company, AES Drax Power Limited, earned a significant
     proportion of its revenues from a Hedging Contract with TXU before the
     contract was terminated in November 2002. This allowed AES Drax Power
     Limited to hedge the risks associated with sales of electricity as a
     purely merchant facility, into the Pool, where generators are subject to
     market-related risks, including general economic conditions, electricity
     demand, weather, increasing competition and other circumstances beyond
     their control.

     Numerical Disclosures

     The numerical disclosures below deal with financial assets and liabilities
     as defined in Financial Reporting Standard 13 Derivatives and Other
     Financial Instruments: Disclosures (FRS13). Certain financial assets and
     liabilities, such as investments in subsidiary companies, are excluded
     from the scope of these disclosures. As permitted by FRS13, short-term
     debtors and creditors have been excluded from the disclosures.


                                     A-18
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

17.  DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)

     Interest rate risk profile of financial assets and financial liabilities

     Financial assets

     The interest rate profile of the Group's financial assets was:

<TABLE>
     --------------------------------------------------------------------------------------------------------------------------
                                                                                                       Financial assets on
                                                 Floating rate              Fixed rate financial       which no interest is
     Currency               Total               financial assets                    assets                    received
     --------               -----               ----------------            --------------------       --------------------
                        31           31           31            31             31            31           31             31
                      December    December     December      December       December      December     December       December
                       2002         2001         2002          2001           2002          2001          2002          2001
                       ----         ----         ----          ----           ----          ----          ----          ----
                  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's
<S>                   <C>           <C>           <C>           <C>                <C>           <C>          <C>            <C>
     Sterling         84,994        60,229        84,994        60,229             -             -             -             -
     Dollar               87         4,325            87         4,325             -             -             -             -
                --------------------------------------------------------------------------------------------------------------
     Total            85,081        64,554        85,081        64,554             -             -             -             -
     --------------------------------------------------------------------------------------------------------------------------
</TABLE>

     The interest rate profile of the Company's financial assets was:

<TABLE>
     --------------------------------------------------------------------------------------------------------------------------
                                                                                                       Financial assets on
                                                 Floating rate              Fixed rate financial       which no interest is
     Currency               Total               financial assets                    assets                    received
     --------               -----               ----------------            --------------------       --------------------
                        31           31           31            31             31            31           31             31
                      December    December     December      December       December      December     December       December
                       2002         2001         2002          2001           2002          2001          2002          2001
                       ----         ----         ----          ----           ----          ----          ----          ----
                  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's
<S>                   <C>           <C>           <C>           <C>                <C>           <C>          <C>            <C>
     Sterling             42        19,247            42        19,247             -             -             -             -
     Dollar               14         4,219            14         4,219             -             -             -             -
                --------------------------------------------------------------------------------------------------------------
     Total                56        23,466            56        23,466             -             -             -             -
     --------------------------------------------------------------------------------------------------------------------------
</TABLE>

     The Group's financial assets comprise of deposits bearing interest at the
     rate agreed between the Group and its banks.

     Financial Liabilities

     After taking account of the various currency and interest rate swaps
     entered into by the Group, the interest rate profile of the Group's
     financial liabilities was:

<TABLE>
     --------------------------------------------------------------------------------------------------------------------------
                                                                                                       Financial liabilities
                                                   Floating rate             Fixed rate financial      on which no interest
     Currency               Total              financial liabilities             liabilities                  is paid
     --------               -----              ---------------------         --------------------       --------------------
                        31           31           31            31             31            31           31             31
                      December    December     December      December       December      December     December       December
                       2002         2001         2002          2001           2002          2001          2002          2001
                       ----         ----         ----          ----           ----          ----          ----          ----
                  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's
<S>                   <C>           <C>           <C>           <C>                <C>           <C>          <C>            <C>
     Sterling      2,260,000     2,260,000       866,775       808,815      968,225     1,026,185        425,000       425,000
     Dollar          127,274       137,779             -             -      127,274       137,779              -             -
                --------------------------------------------------------------------------------------------------------------
     Total         2,387,274     2,397,779       866,775       808,815    1,095,499     1,163,964        425,000       425,000
     --------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                     A-19
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

17.  DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)

<TABLE>
     ----------------------------------------------------------------------------------------------------------
                                                              Financial liabilities on which no interest is
     Currency         Fixed rate financial liabilities                            paid
     --------         --------------------------------        ---------------------------------------------
                  Weighted average interest       Weighted average period for       Weighted average period
                             rate                     which rate is fixed                until maturity
                  -------------------------       ---------------------------       -----------------------
                      31             31               31               31               31             31
                   December       December         December         December         December       December
                     2002           2001             2002             2001             2002           2001
                     ----           ----             ----             ----             ----           ----
                      %               %             Years            Years        (pound)000's    (pound)000's
<S>                 <C>             <C>              <C>              <C>              <C>            <C>
     Sterling       9.271           9.229            15.3             15.7             15.3           15.7
     Dollar        10.955          10.996            15.3             15.7             15.3           15.7
     ----------------------------------------------------------------------------------------------------------
</TABLE>

     After taking account of the various currency and interest rate swaps
     entered into by the Group, the interest rate profile of the Company's
     financial liabilities was:

<TABLE>
     ------------------------------------------------------------------------------------------------------------------------
                                                                                                  Financial liabilities
                                                 Floating rate          Fixed rate financial       on which no interest
     Currency             Total              financial liabilities          liabilities                   is paid
     --------             -----              ---------------------      --------------------      ---------------------
                     31            31           31            31            31            31           31            31
                  December      December     December      December      December      December     December      December
                    2002          2001         2002          2001          2002          2001         2002          2001
                    ----          ----         ----          ----          ----          ----         ----          ----
               (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's  (pound)000's
<S>               <C>           <C>              <C>          <C>        <C>           <C>              <C>          <C>
     Sterling     135,000       135,000          -            -          135,000       135,000          -            -
     Dollar       127,274       137,779          -            -          127,274       137,779          -            -
               -------------------------------------------------------------------------------------------------------------
      Total       262,274       272,779          -            -          262,274       272,779          -            -
     ------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
     ------------------------------------------------------------------------------------------------------------------------
                                                                Financial liabilities on which no interest is
     Currency          Fixed rate financial liabilities                              paid
     --------          --------------------------------         ---------------------------------------------
                  Weighted average interest       Weighted average period for       Weighted average period
                             rate                     which rate is fixed                until maturity
                  -------------------------       ---------------------------       -------------------------
                      31             31               31               31               31             31
                   December       December         December         December         December       December
                     2002           2001             2002             2001             2002           2001
                      %               %             Years            Years         (pound)000's   (pound)000's
<S>                 <C>            <C>                <C>             <C>               <C>            <C>
     Sterling       11.250         11.250             10               10               10             10
     Dollar         10.955         10.996             10               10               10             10
     ------------------------------------------------------------------------------------------------------------------------
</TABLE>

     The floating rate liabilities comprise Original Bonds of
     (pound)734,775,000 (2001: (pound)676,815,000) and New Bonds of
     (pound)132,000,000 (2001: (pound)132,000,000) that bear interest at rates
     based upon LIBOR for terms of up to six months.

     The fixed rate liabilities comprise Original Bonds of(pound)565,225,000
     (2001:(pound)623,185,000), New Bonds of(pound)268,000,000 (2001:
     (pound)268,000,000) and Notes of(pound)262,274,000
     (2001:(pound)272,779,000) that bear interest rates set under the terms of
     the bonds.

     The financial liability on which no interest is paid is the forward
     purchase of shares by AES Drax Acquisition Limited.


                                     A-20
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

17.  DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)

     Maturity of financial liabilities

     The maturity profile of the Group's financial liabilities was as follows:

<TABLE>
     ------------------------------------------------------------------------------------------------------------
                                                                                  Borrowings
                                                                                  ----------
                                                                         31                         31
                                                                      December                   December
                                                                        2002                       2001
                                                                        ----                       ----
                                                                    (pound)000's              (pound)000's
<S>                                                                   <C>                       <C>
     In one year or less, or on demand                                    -                         -
     In more than one year but not more than two years                    -                         -
     In more than two years but not more than five years                  -                         -
     In more than five years                                          2,387,274                 2,397,779
     ------------------------------------------------------------------------------------------------------------
</TABLE>

     The maturity profile of the Company's financial liabilities was as
     follows:

<TABLE>
     ------------------------------------------------------------------------------------------------------------
                                                                                  Borrowings
                                                                                  ----------
                                                                         31                         31
                                                                      December                   December
                                                                        2002                       2001
                                                                        ----                       ----
                                                                    (pound)000's              (pound)000's
<S>                                                                   <C>                       <C>
     In one year or less, or on demand                                    -                         -
     In more than one year but not more than two years                    -                         -
     In more than two years but not more than five years                  -                         -
     In more than five years                                           262,274                   272,779
     ------------------------------------------------------------------------------------------------------------
</TABLE>

     Fair Value Disclosures

     Set out below is a comparison of book values and fair values of the
     Group's financial assets and liabilities.

<TABLE>
     ------------------------------------------------------------------------------------------------------------
                                                                    31 December 2002            31 December 2001
                                                                    ----------------            ----------------
                                                                   Book          Fair          Book         Fair
                                                                   Value        Value          Value        Value
                                                                   -----        -----          -----        -----
                                                               (pound)000's  (pound)000's  (pound)000's  (pound)000's

<S>                                                              <C>           <C>          <C>          <C>
     Financial assets
     Bank deposits                                                  85,081        85,081       64,554       64,554

     Primary financial instruments issued to finance the
     Group's operations
     Long-term borrowings                                        2,387,274     1,858,582    2,397,779    2,096,715

     Derivative  financial  instruments  held to  manage  the
     interest rate and currency profile
     Interest rate swaps                                            -            (75,870)      -           (46,983)
     Currency swaps                                                 -              7,812       -            13,111
     ------------------------------------------------------------------------------------------------------------
</TABLE>


                                     A-21
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

17.  DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)

     Set out below is a comparison of book values and fair values of the
     Company's financial assets and liabilities.

<TABLE>
     ------------------------------------------------------------------------------------------------------------
                                                                    31 December 2002            31 December 2001
                                                                    ----------------            ----------------
                                                                   Book          Fair          Book         Fair
                                                                   Value        Value          Value        Value
                                                                   -----        -----          -----        -----
                                                               (pound)000's  (pound)000's  (pound)000's  (pound)000's

<S>                                                              <C>           <C>          <C>          <C>
     Financial assets
     Bank deposits                                                      56            56       23,466       23,466

     Primary financial instruments issued to finance the
     Group's operations
     Long-term borrowings                                          262,274         5,245      272,779      188,406

     Derivative financial instruments held to manage the
     interest rate and currency profile
     Currency swaps                                                   -              -            -           (408)
     ------------------------------------------------------------------------------------------------------------
</TABLE>

     The fair values of financial assets have been determined by reference to
     quoted market prices where available. The estimated difference between the
     book and fair value of such assets is not material.

     The fair value of the long-term borrowings have been determined by
     reference to either a quoted market value or, the fair values of the
     unquoted debt have been calculated by discounting the estimated cash flows
     for each instrument at the appropriate market discount rate, in effect at
     the balance sheet date.

     The fair value of the currency swaps and sterling and US Dollar
     denominated bonds have been determined by reference to prices available
     from the markets on which these instruments or similar instruments are
     traded.

     Gains and losses on financial assets and financial liabilities held or
     issued for trading

     No gains or losses have been recognised which relate to trading in
     financial assets and financial liabilities.

     Gains and losses on hedges

     The Group enters into CFDs, EFAs and similar contracts to hedge against
     fluctuations in the selling price for electricity obtained from the Pool.
     It also uses interest rate swaps and currency swaps to manage its interest
     rate profile and currency risk. Changes in the fair value of instruments
     used as hedges are not recognised in the financial statements until the
     hedged position matures. An analysis of unrecognised gains and losses is
     as follows:


                                     A-22
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

17.  DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)

<TABLE>
     --------------------------------------------------------------------------------------------------------------
                                                          Gains                Losses             Total Net
                                                          -----                ------             ---------
                                                      (pound)000's         (pound)000's         (pound)000's
<S>                                                     <C>                  <C>                  <C>
     Unrecognised gains and losses on hedges at 1
     January 2002                                        13,519              (47,391)             (33,872)
     Gains and losses arising in previous years
     that were recognised in the year                   (13,519)              47,391               33,872
                                                     --------------------------------------------------------------
     Gains and losses arising before 1 January
     2002 that were not recognised in the year              -                    -                     -
     Gains and losses arising in the year that
     were not recognised in the year                      7,812               (75,870)             (68,058)
                                                     --------------------------------------------------------------
     Unrecognised gains and losses at 31 December
     2002                                                 7,812               (75,870)             (68,058)
                                                     ==============================================================
     Gains and losses expected to be recognised in
     the next financial year                                -                    -                    -
     Gains and losses expected to be recognised
     after the next financial year                        7,812               (75,870)             (68,058)
                                                     ==============================================================
     --------------------------------------------------------------------------------------------------------------
</TABLE>

     The Company enters into currency swaps to manage its currency risk.
     Changes in the fair value of instruments used as hedges are not recognised
     in the financial statements until the hedged position matures. An analysis
     of unrecognised gains and losses is as follows:

<TABLE>
     --------------------------------------------------------------------------------------------------------------
                                                          Gains                Losses             Total Net
                                                          -----                ------             ---------
                                                      (pound)000's         (pound)000's         (pound)000's
<S>                                                     <C>                  <C>                  <C>
     Unrecognised gains and losses on hedges at 1
     January 2002                                           -                  (408)                (408)
     Gains and losses arising in previous years
     that were recognised in the year                       -                   408                  408
                                                     --------------------------------------------------------------
     Gains and losses arising before 1 January
     2002 that were not recognised in the year              -                    -                    -
     Gains and losses arising in the year that
     were not recognised in the year                        -                    -                    -
                                                     --------------------------------------------------------------
     Unrecognised gains and losses at 31 December
     2002                                                   -                    -                    -
                                                     ==============================================================
     Gains and losses expected to be recognised in
     the next financial year                                -                    -                    -
     Gains and losses expected to be recognised
     after the next financial year                          -                    -                    -
                                                     ==============================================================
     --------------------------------------------------------------------------------------------------------------
</TABLE>


                                     A-23
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


18.  PROVISIONS FOR LIABILITIES AND CHARGES

<TABLE>
                                                                                     Group
                                                                 At 1 January    Current year      At 31 December
                                                                         2002          credit                2002
                                                                  (pound)'000     (pound)'000         (pound)'000

<S>                                                                    <C>              <C>                <C>
     Deferred taxation                                                 17,278           (510)              16,768
     Reinstatement provision                                              110               -                 110
                                                                      -------        -------              -------
                                                                       17,388           (510)              16,878
                                                                      =======        =======              =======
</TABLE>

     The amounts of deferred taxation provided and unprovided in the financial
     statements are:

<TABLE>
     Group                                                            2002                        2001
                                                                                  Not                        Not
                                                               Provided      provided     Provided      provided
                                                            (pound)'000   (pound)'000  (pound)'000   (pound)'000

<S>                                                              <C>                <C>     <C>                <C>
     Capital allowances in excess of depreciation                16,768             -       17,278             -
                                                                 ======        ======       ======        ======
</TABLE>

     There are no provisions for liabilities and charges in the company, and no
     amounts of unprovided deferred taxation.

19.  CALLED UP SHARE CAPITAL

<TABLE>
                                                                                            2002             2001
                                                                                     (pound)'000      (pound)'000

<S>                                                                                      <C>              <C>
     Authorised
       224,000,000 ordinary shares of(pound)1 each                                       224,000          224,000
                                                                                         =======          =======

     Called up, allotted and fully paid
       172,000,000 ordinary shares of(pound)1 each                                       172,000          172,000
                                                                                         =======          =======
</TABLE>

20.  PROFIT AND LOSS ACCOUNT

<TABLE>
                                                                                           Group          Company
                                                                                     (pound)'000      (pound)'000

<S>                                                                                     <C>              <C>
     At 1 January 2002                                                                   (53,204)         (41,232)
     Retained loss for the financial year                                               (771,452)         (20,168)
     Other reserve movement                                                              189,000                -
                                                                                        --------          -------

     At 31 December 2002                                                                (635,656)         (61,400)
                                                                                        ========          =======
</TABLE>

     The other reserve movement relates to an accounting difference arising on
     group reconstruction within the year.


                                     A-24
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


21.  RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

                                                          Group       Company
                                                    (pound)'000   (pound)'000

     Loss for the financial year                       (771,452)      (20,168)
     Other reserve movement                             189,000             -
                                                       --------       -------

     Net reduction in shareholders' funds              (582,452)      (20,168)
     Opening shareholders' funds                        118,796       130,768
                                                       --------       -------
     Closing shareholders' funds                       (463,656)      110,600
                                                       ========       =======

22.  RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
     ACTIVITIES

<TABLE>
                                                            Group                                        Company
                                                        2002         2001         2000         2002         2001         2000
                                                 (pound)'000  (pound)'000  (pound)'000  (pound)'000  (pound)'000  (pound)'000

<S>                                                <C>            <C>          <C>           <C>             <C>         <C>
     Operating (loss) / profit                     (589,399)      142,737      173,541       10,508          386         (287)
     Depreciation                                    32,854        32,503       31,937            -            -            -
     Amortisation of goodwill                        33,876        33,876       33,876            -            -            -
     Loss on disposal of fixed assets                     -            19            -            -            -            -
     Plant spares issues                                 24           155            -            -            -            -
     Amortisation of deferred financing costs         5,947         6,031        4,606          548          501            1
     Amortisation of coupon prepayment               14,457        13,265            -            -            -            -
     Utilisation of unfavourable contract
       provision                                          -       (17,789)     (25,188)           -            -            -
     Increase / (decrease) in stocks                 31,236        (2,617)      (7,413)           -            -            -
     Decrease / (increase) in debtors                63,665        75,858     (116,488)           -        3,073     (238,511)
     Increase / (decrease) in creditors               6,287       (42,858)      59,755       (3,790)         130           73
     Impairment of fixed assets                     579,000             -            -            -            -            -
                                                    -------       -------      -------        -----        -----     --------
                                                    177,947       241,180      154,626        7,266        4,090     (238,724)
                                                    =======       =======      =======        =====        =====     ========
</TABLE>

23.  RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

<TABLE>
                                                        2002         2001         2000         2002         2001         2000
                                                 (pound)'000  (pound)'000  (pound)'000  (pound)'000  (pound)'000  (pound)'000

<S>                                               <C>          <C>          <C>           <C>           <C>          <C>
     Increase / (decrease) in cash in the year         1,440       (7,986)      (6,885)     (7,396)        6,962          467
     Increase / (decrease) in restricted cash
       deposits                                       19,087        1,255       24,476     (16,014)          806       15,231
     Cash inflow from increase in debt
       financing                                           -            -     (417,773)          -       (68,500)    (267,773)
     Translation difference                           10,505       (4,720)        (286)     10,505        (4,720)        (286)
                                                  ----------   ----------   ----------    --------      --------     --------
     Movement in net debt in the year                 31,032      (11,451)    (400,468)    (12,905)      (65,452)    (252,361)
     Net debt brought forward                     (2,333,225)  (2,321,774)  (1,921,306)   (317,813)     (252,361)           -
                                                  ----------   ----------   ----------    --------      --------     --------
     Net debt carried forward                     (2,302,193)  (2,333,225)  (2,321,774)   (330,718)     (317,813)    (252,361)
                                                  ==========   ==========   ==========    ========      ========     ========
</TABLE>


                                     A-25
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


24.  ANALYSIS OF CHANGES IN NET DEBT

<TABLE>
     Group                                                           At 1                     Foreign         At 31
                                                                  January                    exchange      December
                                                                     2002     Cash flow      movement          2002
                                                              (pound)'000   (pound)'000   (pound)'000   (pound)'000

<S>                                                            <C>               <C>           <C>       <C>
     Cash at bank and in hand                                      38,823         1,440             -        40,263
     Restricted cash deposits                                      25,731        19,087             -        44,818
                                                               ----------        ------        ------    ----------
                                                                   64,554        20,527             -        85,081

     Other loans                                               (2,397,779)            -        10,505    (2,387,274)
                                                                ---------       -------        ------     ---------
                                                               (2,333,225)       20,527        10,505    (2,302,193)
                                                                =========       =======        ======     =========


     Company                                                         At 1                     Foreign         At 31
                                                                  January                    exchange      December
                                                                     2002     Cash flow      movement          2002
                                                              (pound)'000   (pound)'000   (pound)'000   (pound)'000

     Cash at bank and in hand                                       7,429        (7,396)            -            33
     Restricted cash deposits                                      16,037       (16,014)            -            23
                                                               ----------        ------        ------    ----------
                                                                   23,466       (23,410)            -            56

     Other loans                                                 (341,279)            -        10,505      (330,774)
                                                               ----------        ------        ------    ----------
                                                                 (317,813)      (23,410)       10,505      (330,718)
                                                               ==========        ======        ======    ==========
</TABLE>

25.  PENSION SCHEME FUNDING

     Pension schemes operated

     Within the UK the Group principally operates an approved defined benefit
     scheme, on behalf of the 'AES Drax Power Group of the Electricity Supply
     Pension Scheme' (ADPG ESPS).

     Regular pension costs - SSAP 24

     Pensions costs for the ADPG ESPS in the year were (pound)1,700,000 (2001:
     (pound)1,469,000), comprising a regular cost of (pound)1,500,000 (2001:
     (pound)1,200,000) plus variations totalling (pound)200,000 (2001:
     (pound)(200,000)). A variation of (pound)(100,000) has arisen due to
     (pound)800,000 of the valuation surplus being carried forward unutilised,
     which is being spread as a level percentage of salaries over the average
     remaining working life of the membership (approximately 11 years). A
     further variation of (pound)(100,000) has arisen due to the application of
     reduced contributions from 1 January 2002 to 31 March 2002 from the
     valuation surplus. The remaining variation of (pound)400,000 has arisen
     due to certain special events, generating additional liabilities and
     triggering employer contributions. In the year, redundancies have resulted
     in an additional pension cost of (pound)400,000, which has been partially
     offset by additional employer contributions of (pound)200,000.


                                     A-26
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

25.  PENSION SCHEME FUNDING (continued)

     The scheme actuary, an employee of Bacon & Woodrow, Actuaries and
     Consultants, assessed the ESPS in respect of the AES Drax Power Group as
     at 31 December 2002 using the projected unit method and a market based
     valuation approach to ascertain its cost to the Group. The principal
     financial assumptions were that the rate of return would be 4.5% per annum
     higher than the rate of price inflation, that increases in past and future
     pensions would be in line with price inflation, and that future salary
     growth would exceed price inflation by 2.75% per annum, depending on
     salary levels at the valuation date. Following the actuarial valuation it
     was agreed that the Group would pay an average contribution rate of 12% of
     annual salaries, subject to review at future valuations.

     At the date of the latest actuarial valuation the market value of the
     assets of the ADPG ESPS was (pound)44.6 million and the actuarial value of
     the assets was sufficient to cover between 115% and 120% of the benefits
     that had accrued to members, after allowing for expected increases in
     future earnings. The next scheduled actuarial valuation of the ADPG ESPS
     will be as at 31 March 2004.

     FRS 17

     In November 2000 the Accounting Standards Board issued FRS 17 'Retirement
     Benefits' replacing SSAP 24 'Accounting for Pensions Costs'. Certain
     disclosures are required in the transition period before the full adoption
     of FRS 17 for periods ending on or after 22 June 2001. These further
     disclosures are included below.

     The actuarial valuation of the ADPG ESPS was updated to 31 December 2002.
     The principal actuarial assumptions used as at 31 December 2002 are shown
     below:

<TABLE>
                                                                                    2002          2001
<S>                                                                                 <C>           <C>
     Rate of increase in salaries                                                   3.8%          4.0%
     Rate of increase of pensions in payment and deferment                          2.5%          2.6%
     Discount rate                                                                  5.4%          5.8%
     Inflation assumption                                                           2.3%          2.5%
</TABLE>

     The following contributions were made to the ADPG ESPS during 2002:

<TABLE>
                                                                                 Year ended
                                                                                31 December
                                                                                       2002
                                                                           (pound)'millions

<S>                                                                                     <C>
     Company contributions                                                              1.6
     Member contributions                                                               0.6
                                                                                     ======

     Analysis of amount charged to Operating Profit:
                                                                                 Year ended
                                                                                31 December
                                                                                       2002
                                                                          (pound)' millions

     Current service cost                                                               1.9
     Past service cost                                                                    -
     Early Retirement Deficiency cost                                                   0.4
                                                                                     ------
     Total Operating cost                                                               2.3
                                                                                     ======
</TABLE>


                                     A-27
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

25.  PENSION SCHEME FUNDING (continued)

     Analysis of amount credited to other finance income:

<TABLE>
                                                                                 Year ended
                                                                                31 December
                                                                                       2002
                                                                          (pound)' millions

<S>                                                                                     <C>
     Expected return on pension plan assets                                             3.3
     Less: Interest on pension plan liabilities                                        (3.2)
                                                                                     ------
     Net return                                                                         0.1
                                                                                     ======
</TABLE>

     The assets and liabilities of the ADPG ESPS as at 31 December 2002 are
     shown below:

<TABLE>
                                                                                       2002               2001
                                                                          (pound)' millions  (pound)' millions

<S>                                                                                    <C>                <C>
     Market value of assets                                                            35.8               43.4

     Actuarial value of liabilities                                                   (60.8)             (53.9)
                                                                                    -------             ------
     Deficit in the Scheme                                                            (25.0)             (10.5)
     Related deferred tax liability (assumed 30% rate)                                  7.5                3.2
                                                                                    -------             ------
     Net pension liability                                                            (17.5)              (7.3)
                                                                                    =======             ======
</TABLE>

     Analysis of movement in surplus during the year:

<TABLE>
                                                                                 Year ended
                                                                                31 December
                                                                                       2002
                                                                          (pound)' millions

<S>                                                                                   <C>
     Surplus in scheme at 1 January 2002                                              (10.5)
     Current service cost                                                              (1.9)
     Contributions                                                                      2.2
     Early Retirement Deficiency cost                                                  (0.4)
     Actuarial gain/(loss)                                                            (14.4)
                                                                                    -------
     Surplus in scheme at 31 December 2002                                            (25.0)
                                                                                    =======
</TABLE>


                                     A-28
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

25.  PENSION SCHEME FUNDING (continued)

     Analysis of amount recognised in Statement of Total Recognised Gains and
     Losses:

<TABLE>
                                                                                 Year ended
                                                                                31 December
                                                                                       2002
                                                                          (pound)' millions

<S>                                                                                   <C>
     Actual return less expected return on pension scheme assets                      (11.8)
     Experience gains/(losses) arising on the scheme liabilities                        0.1
     Changes in  assumptions  underlying  the present  value of the scheme
     liabilities                                                                       (2.7)
                                                                                     ------
     Actuarial gain/(loss) recognised in STRGL                                        (14.4)
                                                                                     ======
</TABLE>

     Had the company adopted FRS 17 early, Group profit and loss reserves would
     have been stated as follows:

<TABLE>
                                                                                           2002              2001
                                                                              (pound)' millions  (pound)' millions

<S>                                                                                      <C>                 <C>
     Profit and loss reserve in the financial statements as at year end                  (635.7)             (53.2)

     Deficit in relation to the ADPG ESPS, net of related deferred tax asset              (17.5)              (7.3)
                                                                                        -------             ------
     Profit and loss reserve as adjusted                                                 (653.2)             (60.5)
                                                                                        =======             ======
</TABLE>

26.  FINANCIAL COMMITMENTS

     In connection with the acquisition of the Drax Power Station, AES Drax
     Power Limited assumed an unfavourable contract to purchase coal for the
     plant. The agreement expired in September 2001. Of the total contract,
     (pound)17,789,000 relates to the estimated unfavourable purchase element.

27.  ULTIMATE PARENT COMPANY

     The immediate parent company is AES Drax Power Finance Holdings Limited, a
     company registered in England and Wales.

     The ultimate parent company and controlling entity is The AES Corporation,
     a company incorporated in the State of Delaware, USA. Copies of the parent
     company's financial statements can be obtained from the Securities and
     Exchange Commission, 450 5th Street NW, Washington DC 20549, USA.

28.  NATURE OF BUSINESS

     The principal activity of the company and its subsidiaries is the
     ownership and operation of the Drax Power Plant, a 3,960 megawatt (gross)
     coal-fired power station based in the North of England.


                                      A-29
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

29.  SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP

     This note is provided in addition to the previous financial information
     for US users of the accounts.

     The financial statements are prepared in accordance with UK GAAP, which
     differ in certain significant respects from US GAAP. These differences
     relate principally to the following items and the approximate effect on
     net income and shareholders' equity is shown in the following table.

     Deferred taxation

     Under UK GAAP, deferred taxation is provided at the anticipated tax rates
     on timing differences arising from the inclusion of items of income and
     expenditure in taxation computations in periods different from those in
     which they are included in the financial statements, to the extent that it
     is probable that an asset or a liability will crystallise in the
     foreseeable future, in accordance with FRS 19. Under US GAAP, deferred
     taxation is provided on all temporary differences under the liability
     method, subject to a valuation allowance where applicable in respect of
     deferred taxation assets, in accordance with SFAS 109, Accounting for
     Income Taxes.

     Additional net deferred tax liabilities recorded at the acquisition date
     under US GAAP resulted in an increase in the amount allocated to tangible
     fixed assets resulting in additional depreciation expense.

     Pensions

     The directors do not believe the adoption of FAS 87 costs would differ
     materially from the pension costs under UK GAAP. Under US GAAP, FAS 87
     requires the recording of an additional minimum pension obligation under
     certain circumstances. No such obligation is required under UK GAAP.

     Interest

     Under UK GAAP, interest is charged on the (pound)1,725 million Guaranteed
     Secured Bonds. Under US GAAP, (pound)425 million forward purchase of
     equity is offset against the (pound)1,725 million Guaranteed Secured bond.
     Therefore, interest under US GAAP is charged on the net (pound)1,300
     million.

     The (pound)1,300 million represents a senior secured bank facility.
     Repayment of the bank facility is secured by a security interest in the
     (pound)1,725 million Guaranteed Secured Bonds. Enforcement of the bank
     facility will give the bank lenders the right to enforce the security
     package granted under the Guaranteed Secured Bonds. Interest on the bank
     facility accrues at LIBOR + 1.8%. Principal repayments are due
     semi-annually over a fifteen year period commencing 30 June 2000.
     Principal repayments of (pound)25 million, (pound)370 million, (pound)2.7
     million, (pound)9.1 million, (pound)22.6 million and (pound)28.1 million
     were made on 30 June 2000, 2 August 2000, 31 December 2000, 30 June 2001,
     31 December 2001 and 30 June 2002, respectively.

     Goodwill

     Under UK GAAP, goodwill arising on the acquisition of subsidiaries
     represents the excess of the fair value of the consideration given over
     the fair value of the identifiable net assets acquired. Goodwill is
     capitalised and amortised over twenty years. Under US GAAP, the
     acquisition has been treated as an acquisition of assets and accordingly
     the entire purchase price, including certain liabilities assumed, has been
     allocated to tangible fixed assets and depreciated over the estimated
     useful lives of the assets, being thirty five years. Under UK GAAP, the
     Company has recorded an impairment loss measured by reference to the value
     in use of the assets. Under US GAAP, an impairment loss on the tangible
     fixed assets is recorded only if the assets are not recoverable from their
     undiscounted cash flows. No impairment had been recognised under US GAAP.

     Severance accrual

     Under US GAAP, an accrual would be recorded as part of the acquisition of
     AES Drax Power Limited for the estimated cost of severing certain
     employees of AES Drax Power Limited. No such accrual has been recorded
     under UK GAAP.

     Derivative Instruments and Hedging Activities

     In order to comply with US GAAP, adjustments are required to be made in
     relation to SFAS 133, Accounting for Derivative Instruments and Hedging
     Activities. This results in the creation of derivative assets and
     liabilities, together with corresponding gains and losses on all
     derivative instruments and hedges.


                                     A-30
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

29.  SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)

<TABLE>
                                                    Three months ended                         Year ended
                                               31 December     31 December     31 December     31 December     31 December
                                                      2002            2001            2002            2001            2000
                                               (pound)'000     (pound)'000     (pound)'000     (pound)'000     (pound)'000

<S>                                                  <C>             <C>            <C>             <C>             <C>
     Net loss under UK GAAP                       (729,745)        (19,804)       (771,452)        (49,556)        (13,791)
     US GAAP adjustments:
          Goodwill                                   8,469           8,469          33,876          33,876          33,876
          Additional depreciation                   (4,838)         (4,838)        (19,350)        (19,350)        (19,350)
          Deferred tax                                (749)          5,293          22,952          14,978          12,303
          Additional depreciation due               (5,081)         (5,081)        (20,326)        (20,326)        (20,326)
            to deferred tax
          Severance pay expensed in the                  -               -               -               -          12,053
            UK
          Interest                                  12,868          11,255          48,370          43,874          44,920
          Unfavourable IT contract                       -               -               -               -           1,995
          Derivative loss                           (1,804)         (6,070)           (354)        (15,985)          3,995
          Impairment of fixed assets               579,000               -         579,000               -               -
                                                  --------         -------        --------         -------          ------
     Net (loss) / income under US GAAP            (141,880)        (10,776)       (127,284)        (12,489)         55,675
                                                  ========         =======        ========         =======          ======
</TABLE>

<TABLE>
                                                                                      2002            2001
                                                                               (pound)'000     (pound)'000

<S>                                                                               <C>               <C>
     Shareholders' (deficit) / equity under UK GAAP                               (463,656)         118,796
     US GAAP adjustments:
         Cumulative effect of previous adjustments                                  72,332           72,454
         Goodwill                                                                   33,876           33,876
         Additional depreciation                                                   (19,350)         (19,350)
         Deferred tax                                                               22,952           14,978
         Additional depreciation due to deferred tax                               (20,326)         (20,326)
         Interest                                                                   48,371           43,874
         Derivatives                                                                (1,324)         (53,174)
         Impairment of fixed assets                                                579,000                -
                                                                                   -------          -------
     Shareholders' equity under US GAAP                                            251,875          191,128
                                                                                   =======          =======
</TABLE>

     The US GAAP adjustment for deferred taxes would result in an increase in
     long term assets under US GAAP of (pound)649 million and (pound)669
     million and an increase in long term liabilities under US GAAP of
     (pound)549 million and (pound)682 million, at 31 December 2002 and 31
     December 2001, respectively.

     The US GAAP adjustment to reflect the substance of the financing structure
     would result in a decrease in current assets under US GAAP of (pound)425
     million at 31 December 2002 and 31 December 2001. It would also result in
     a decrease in long term liabilities under US GAAP of (pound)931 million
     and (pound)913 million and an increase in current liabilities under US
     GAAP of (pound)49 million and (pound)59 million, at 31 December 2002 and
     31 December 2001, respectively.

     Under US GAAP, an additional long-term obligation of (pound)11 million
     would be recorded for minimum pension obligations.


                                     A-31
<PAGE>

AES DRAX ENERGY LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

29.  SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)

     A reconciliation of the consolidated cash flow statement prepared under UK
     GAAP to a statement of cash flows prepared under US GAAP is as follows:

<TABLE>
                                                                    Year ended       Year ended       Year ended
                                                                   31 December      31 December      31 December
                                                                          2002             2001             2000
                                                                   (pound)'000      (pound)'000      (pound)'000

<S>                                                                    <C>              <C>              <C>
     Net cash inflow from operating activities                         177,947          241,180          154,626
     Returns on investments and servicing of finance                  (151,848)        (194,660)        (141,812)
     Taxation                                                             (348)          (9,161)         (19,238)
                                                                      --------         --------         --------

     Net cash flows provided by / (used in) operating activities
      per US GAAP                                                       25,751           37,359           (6,424)
                                                                      --------         --------         --------

     Capital expenditure                                                (5,224)          (6,090)          (6,493)
     Increase in restricted cash deposits                              (19,087)          (1,255)         (24,476)
                                                                      --------         --------         --------

     Net cash used in investing activities per US GAAP                 (24,311)          (7,345)         (30,969)
                                                                      --------         --------         --------

     Repurchase of share capital                                             -          (38,000)         (14,000)
     New borrowings                                                          -                -          668,059
     Repayment of borrowings                                                 -                -         (250,000)
     Prepayment of coupons                                                   -                -         (373,551)
                                                                      --------         --------         --------

     Net cash (used in) / provided by financing activities per
     US GAAP                                                                 -          (38,000)          30,508
                                                                      ========         ========         ========

     Increase / (decrease) in cash                                       1,440           (7,986)          (6,885)
     Increase in restricted cash deposits                               19,087            1,255           24,476
     Cash brought forward                                               64,554           71,285           53,694
                                                                      --------         --------         --------

     Cash carried forward                                               85,081           64,554           71,285
                                                                      ========         ========         ========
</TABLE>

     Comprehensive income / (loss) under US GAAP is as follows:

<TABLE>
                                                                    Year ended       Year ended       Year ended
                                                                   31 December      31 December      31 December
                                                                          2002             2001             2000
                                                                   (pound)'000      (pound)'000      (pound)'000

<S>                                                                   <C>               <C>               <C>
     Net (loss) / income under US GAAP                                (127,284)         (12,489)          55,675

     Derivative gain / (loss)                                             (970)         (37,189)               -
     Minimum pension obligation                                         (7,560)               -                -
                                                                      --------          -------           ------
     Comprehensive (loss) / income                                    (135,814)         (49,678)          55,675
                                                                      ========          =======           ======
</TABLE>


                                     A-32
<PAGE>

Company Registration No. 3878799






AES DRAX POWER FINANCE HOLDINGS LIMITED


Financial Statements

31 December 2002





Deloitte & Touche
Leeds


<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


FINANCIAL STATEMENTS 2002


CONTENTS                                                                Page


Independent auditors' report                                               1

Consolidated profit and loss account                                       2

Statement of total recognised gains and losses                             2

Consolidated balance sheet                                                 3

Consolidated cash flow statement                                           4

Notes to the accounts                                                      5


<PAGE>


INDEPENDENT AUDITORS' REPORT TO THE DIRECTORS OF AES DRAX POWER FINANCE
HOLDINGS LIMITED


We have audited the accompanying balance sheets of AES Drax Power Finance
Holdings Limited as of 31 December 2002 and 2001, and the related Profit and
Loss accounts, Statement of total recognised gains and losses and cash flows
for the three years in the period ended 31 December 2002. The profit and loss
account for the three months ended 31 December 2002 and 2001 has not been
subject to audit. These financial statements are the responsibility of the
Company's Directors. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom and the United States of America. 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 the
Directors, 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 financial statements present fairly, in all material
respects, the financial position of the Company at 31 December, 2002 and 2001,
and the results of its operations and its cash flows for the years then ended
in conformity with accounting principles generally accepted in the United
Kingdom.

Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States of America. The application of the latter would have affected the
determination of net income for each of the three years in the period ended 31
December 2002 and the determination of stockholders' equity and financial
position at 31 December 2002 and 2001, to the extent summarised in Note 28.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the uncertainty as to the outcome of discussions with the
Company's lenders regarding the financial restructuring of the project raises
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.


/s/ Deloitte & Touche

Deloitte & Touche

Chartered Accountants and Registered Auditors

14th May 2003


                                      B-1
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


CONSOLIDATED PROFIT AND LOSS ACCOUNT
Periods ended 31 December 2002

<TABLE>

                                                        Three months ended                           Year ended
                                                   31 December     31 December   31 December      31 December     31 December
                                                          2002            2001          2002             2001            2000
                                                   (pound)'000     (pound)'000   (pound)'000      (pound)'000     (pound)'000
                                                     Unaudited       Unaudited
<S>                                                    <C>              <C>             <C>              <C>            <C>

TURNOVER - continuing operations          2            137,661         143,466       524,831          586,104         622,753

Cost of sales                                          (69,603)        (59,115)     (219,462)        (267,204)       (278,218)
                                                      --------        --------     ---------        ---------       ---------

GROSS PROFIT                                            68,058          84,351       305,369          318,900         344,535

Administrative expenses - normal                       (46,826)        (54,061)     (178,967)        (176,161)       (171,017)
                        - exceptional     4           (715,801)              -      (715,801)               -               -
                                                      --------        --------     ---------        ---------       ---------
                                                      (762,627)        (54,061)     (894,768)        (176,161)       (171,017)
                                                      --------        --------     ---------        ---------       ---------
OPERATING (LOSS) / PROFIT - continuing    3           (694,569)         30,290      (589,399)         142,739         173,518
  operations

Interest receivable and other income      5              5,748           3,581        23,824           16,204          12,891

Interest payable and similar charges      6            (50,558)        (51,303)     (206,387)        (197,771)       (178,017)
                                                      --------        --------     ---------        ---------       ---------
(LOSS) / PROFIT ON ORDINARY ACTIVITIES
  BEFORE TAXATION                                     (739,379)        (17,432)     (771,962)         (38,828)          8,392

Tax on (loss) / profit on ordinary        7              9,634          (2,371)          510          (10,886)        (22,435)
  activities
                                                      --------        --------     ---------        ---------       ---------
RETAINED LOSS FOR THE FINANCIAL PERIOD /
  YEAR TRANSFERRED FROM RESERVES          19          (729,745)        (19,803)     (771,452)         (49,714)        (14,043)
                                                      ========         =======      ========          =======         =======
</TABLE>

STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

There are no recognised gains and losses for the current or preceding financial
period other than as stated in the profit and loss account. Therefore, no
statement of total recognised gains and losses has been presented.


                                      B-2
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


CONSOLIDATED BALANCE SHEET
31 December 2002

<TABLE>

                                                                  Note                    2002            2001
                                                                                   (pound)'000     (pound)'000
<S>                                                                 <C>                   <C>            <C>

FIXED ASSETS
Intangible assets                                                    8                         -        594,610
Tangible assets                                                      9                 1,083,118      1,140,245
                                                                                       ---------      ---------
                                                                                       1,083,118      1,734,855
                                                                                       ---------      ---------
CURRENT ASSETS
Stocks                                                              10                    31,327         62,563
Debtors                                                             11                   879,932        963,946
Cash at bank and in hand                                            12                    85,087         64,560
                                                                                       ---------      ---------
                                                                                         996,346      1,091,069

CREDITORS: amounts falling due within one year                      13                  (138,991)      (102,708)
                                                                                       ---------      ---------

NET CURRENT ASSETS                                                                       857,355        988,361
                                                                                       ---------      ---------
TOTAL ASSETS LESS CURRENT LIABILITIES                                                  1,940,473      2,723,216

CREDITORS: amounts falling due after more than one year             14                (2,558,642)    (2,758,423)

PROVISIONS FOR LIABILITIES AND CHARGES                              17                   (16,878)       (17,388)
                                                                                       ---------      ---------
                                                                                        (635,047)       (52,595)
                                                                                       =========      =========
CAPITAL AND RESERVES
Called up share capital                                             18                     1,000          1,000
Profit and loss account                                             19                  (636,047)       (53,595)
                                                                                       ---------      ---------
TOTAL EQUITY SHAREHOLDERS' DEFICIT                                                      (635,047)       (52,595)
                                                                                       =========      =========
</TABLE>


These financial statements were approved by the Board of Directors on May 14,
2003.

Signed on behalf of the Board of Directors



Garry Levesley
--------------------
Director


                                      B-3
<PAGE>


AES DRAX POWER FINANCE HOLDINGS LIMITED


CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 December 2002

<TABLE>
                                                                       Note           2002           2001           2000
                                                                               (pound)'000    (pound)'000    (pound)'000
<S>                                                                      <C>      <C>            <C>            <C>
Net cash inflow from operating activities                                21        177,947        203,340        140,791

Returns on investments and servicing of finance
Interest received                                                                   23,769         16,211         12,564
Interest paid                                                                     (175,617)      (211,031)      (154,605)
                                                                                  --------       --------       --------

                                                                                  (151,848)      (194,820)      (142,041)
                                                                                  --------       --------       --------

Taxation                                                                              (348)        (9,161)       (19,196)

Capital expenditure
Payments to acquire tangible fixed assets                                           (5,224)        (6,119)       (11,993)
Receipts from sale of tangible fixed assets                                              -             29          5,500
                                                                                  --------       --------       --------
                                                                                    (5,224)        (6,090)        (6,493)
                                                                                  --------       --------       --------
Cash inflow / (outflow) before use of liquid resources and                          20,527         (6,731)       (26,939)
financing

Management of liquid resources
Increase in restricted cash deposits                                               (19,087)        (1,255)       (24,477)

Financing
Prepayment of coupons                                                                    -              -       (373,551)
Repayment of borrowings                                                                  -              -       (250,000)
New borrowings                                                                           -              -        668,059
                                                                                  --------       --------       --------
Increase / (decrease) in cash in the year                             22,23          1,440         (7,986)        (6,907)
                                                                                  ========       ========       ========
</TABLE>


                                      B-4
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

1.     ACCOUNTING POLICIES

       The financial statements are prepared in accordance with applicable
       United Kingdom accounting standards. The particular accounting policies
       adopted are described below.

       Basis of preparation of financial statements

       Following the termination of the Hedging Contract with TXU and the
       appointment of joint administrators for TXU Energy and TXU Europe on
       November 18 and 19, 2002, respectively, the company entered discussions
       with its senior lenders in order to address the potential defaults under
       the senior financing documents arising from the TXU situation.

       In addition, certain of the forward looking debt service cover ratios at
       June 30, 2002, were below the threshold required to permit
       distributions. As a result, AES Drax Power was not permitted to make
       distributions to AES Drax Energy to permit interest due on the high
       yield notes to be paid on August 30, 2002. The AES Corporation, however,
       made a contribution to AES Drax Energy which together with amounts then
       held in the high yield note debt service reserve account was sufficient
       to make the payments then due. At the time the AES Corporation stated
       that there were no assurances that it would agree to make any similar
       payments in the future. Any improvement in the forward looking ratios
       were dependent on a favourable change in the forward curve for
       electricity prices during the period from June 30 to December 31, 2002.
       Such improvements did not occur and the ratios were below 1.19:1 at
       December 31, 2002.

       Moreover, there are insufficient funds remaining in the high yield note
       debt service reserve account to cover such payments. AES Drax Energy was
       unable to pay the interest due on the notes on time at the end of
       February 2003. Such failure constitutes an event of default under the
       notes, although any enforcement rights are subject to a 90-day grace
       period as well as the terms and conditions of certain intercreditor
       arrangements.

       On December 13, 2002, AES Drax signed an agreement regarding certain
       standstill arrangements with the steering committee representing the
       bank lenders and an ad hoc committee formed by holders of the senior
       bonds. The purpose of the standstill is to provide AES Drax and the
       senior creditors with a period of stability during which discussions
       regarding consensual restructuring of AES Drax can take place. The
       standstill period will expire on May 31, 2003, unless extended. The bank
       lenders and the senior bondholders have agreed to waive certain events
       of default under the Eurobonds or the senior bonds, as applicable, not
       to accelerate payment of the obligations and would not seek to enforce
       security during the standstill period.

       Under the Standstill Agreement, AES Drax's bank lenders and senior
       bondholders have agreed to certain amendments and waivers to their
       respective financing documents which permits AES Drax to have access to
       at least (pound)30,000,000 of funds currently unavailable under the
       financing documentation. These funds, subject to certain consent rights
       of the steering committee of the bank lenders and the ad hoc committee
       of senior bondholders, are available to provide credit support to
       electricity counterparties and suppliers and for working capital needs.

       Failure to effect a satisfactory restructuring of AES Drax could lead to
       an event of default under the senior financing documents and the
       withdrawal of support by the Company's lenders.

       The Directors believe that the standstill agreement will facilitate an
       agreed restructuring of AES Drax. On this basis, the Directors consider
       it appropriate to prepare the financial statements on the going concern
       basis. The financial statements do not include any adjustments that
       would result from a withdrawal of support by the Company's lenders.

       Accounting convention

       The financial statements are prepared under the historical cost
       convention.


                                      B-5
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

1.     ACCOUNTING POLICIES (continued)

       Basis of consolidation

       The group consolidates the accounts of the company and all of its
       subsidiary undertakings up to 31 December 2002.

       Intangible fixed assets

       Goodwill represents the excess of the fair value of the consideration
       given over the fair value of the identifiable net assets acquired.
       Acquired goodwill is capitalised and amortised over 20 years.

       Tangible fixed assets

       Freehold land and assets in the course of construction are not
       depreciated. Depreciation is provided on cost in equal annual
       instalments over the estimated useful lives of the assets. The estimated
       useful lives are:

       Freehold buildings, plant and machinery         30-40 years
       Fixtures and fittings                           3-5 years

       Investments

       Investments held as fixed assets are stated at cost less provision for
       any impairment in value.

       Stocks

       Stocks are stated at the lower of cost, inclusive of appropriate
       overheads, and net realisable value. Net realisable value is based on
       estimated selling price less all further costs to completion and all
       relevant marketing, selling and distribution costs.

       Deferred taxation

       Deferred taxation is provided in full on timing differences that result
       in an obligation at the balance sheet date to pay more tax, or a right
       to pay less tax, at a future date, at rates expected to apply when they
       crystallise based on current tax rates and law. Timing differences arise
       from the inclusion of items of income and expenditure in taxation
       computations in periods different from those in which they are included
       in the financial statements.

       Deferred tax assets are recognised to the extent that it is regarded as
       more likely than not that they will be recovered. Deferred tax assets
       and liabilities are not discounted.

       FRS 19 'Deferred Tax' has been adopted in the year and has not
       resulted in any change to comparative figures.

       Leased assets

       Operating lease rentals are charged to income in equal annual amounts
       over the lease term.

       Pension costs

       Pension contributions are charged to the profit and loss account so as
       to spread the cost of pensions over employees' working lives. The
       regular cost is attributed to individual years using the projected unit
       credit method. Variations in pension costs, which are identified as a
       result of actuarial valuations, are amortised over the average expected
       remaining working lives of employees. Differences between the amounts
       funded and the amounts charged to the profit and loss account are
       treated as either provisions or a prepayment in the balance sheet.

       Revenue recognition

       Revenues from the sale of electricity are recorded based upon output
       delivered and capacity provided at rates specified under contract terms
       or prevailing market rates.


                                      B-6
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

1.     ACCOUNTING POLICIES (continued)

       Deferred Finance Costs

       Financing costs are deferred and amortised over the related financing
       period using the effective interest method of amortisation. Deferred
       financing costs are shown net of accumulated amortisation of (pound)16.7
       million and (pound)10.8 million as of 31 December 2002 and 31 December
       2001, respectively.

       Derivatives

       The group enters into various derivative transactions in order to hedge
       their exposure to certain market risks. The group currently has
       outstanding interest rate swap, cap and floor agreements that hedge
       against interest rate exposure on floating rate debt. Interest swaps,
       caps and floors are accounted for by adjusting the interest rate cost on
       the floating rate debt.

       Use of estimates

       The preparation of financial statements in conformity with generally
       accepted accounting principles requires the company to make estimates
       and assumptions that affect reported amounts of assets and liabilities
       and disclosures of contingent assets and liabilities at the date of the
       financial statements, as well as the reported amounts of revenues and
       expenses during the reporting period. Actual results could differ from
       those estimates.

2.     TURNOVER

       Turnover comprises primarily sales to the electricity trading market in
       England and Wales of electricity generated by the group. Most of the
       power plant's revenue relies primarily on sales contracts with a few
       large customers. One customer accounted for 65.1% of revenues in the
       year to 31 December 2002. Two customers accounted for 67.9% and 9.0% of
       revenues in 2001.

3.     OPERATING (LOSS) / PROFIT
<TABLE>
                                                                        Year ended       Year ended         Year ended
                                                                       31 December      31 December        31 December
                                                                              2002             2001               2000
                                                                       (pound)'000      (pound)'000        (pound)'000
<S>                                                                         <C>              <C>                <C>
       Operating (loss) / profit is after charging / (crediting):

       Depreciation of owned assets                                         32,854           32,503             31,937
       Amortisation of goodwill                                             33,876           33,876             33,876
       Utilisation of unfavourable contract provision                            -          (17,789)           (25,188)
       Amortisation of deferred financing costs                              5,947            6,031              4,606
       Exchange (gain) / loss on US dollar bonds                           (11,823)           5,241                286
       Exchange gain on derivatives                                              -           (6,140)                 -
                                                                            ======           ======             ======
</TABLE>


                                      B-7
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

4.     EXCEPTIONAL ITEMS
                                 Year ended       Year ended       Year ended
                                31 December      31 December      31 December
                                       2002             2001             2000
                                (pound)'000      (pound)'000      (pound)'000

Bad debt expense                    136,801                -                -
Impairment loss (see Note 8 & 9)    579,000                -                -
                                    -------          -------          -------
                                    715,801                -                -
                                    =======          =======          =======

       On 14 October 2002, TXU Corp withdrew financial support for its
       subsidiary TXU Europe Group plc ("TXU Europe"). As a consequence of
       this, on 18 November 2002, the Company terminated the Hedging Contract
       with TXU Europe Energy Trading Limited ("TXU Energy"), a subsidiary of
       TXU Europe, to minimise financial exposure. On 19 November 2002, TXU
       Europe filed a petition on behalf of itself, TXU U.K Ltd and TXU Energy,
       seeking protection from its creditors, which was approved, putting the
       three companies into temporary administration. As a result, the Company
       has made 100% provision against all amounts owed by TXU Energy in
       respect of the Hedging Contract and the termination of that contract, as
       at 18 November 2002.

       Also included within administrative expenses is an exceptional item of
       (pound)579 million in respect of an impairment loss on goodwill and
       fixed assets. The impairment loss was measured by reference to the value
       in use of the assets using a discount rate of 7.9% which reflects the
       risks inherent in the forecast cash flows.

       The tax effect of the bad debt expense is (pound)41 million. The
       impairment of goodwill and fixed assets is non-deductible and so has no
       tax effect.


5.     INTEREST RECEIVABLE AND SIMILAR INCOME

                               Year ended       Year ended      Year ended
                              31 December      31 December     31 December
                                     2002             2001            2000
                              (pound)'000      (pound)'000     (pound)'000

Bank interest receivable           23,824           16,204          12,891
                                   ======           ======          ======


6.     INTEREST PAYABLE AND SIMILAR CHARGES


                              Year ended       Year ended      Year ended
                             31 December      31 December     31 December
                                    2002             2001            2000
                             (pound)'000      (pound)'000     (pound)'000

Bank and other loans             206,387          197,771         178,017
                                 =======          =======         =======


                                      B-8
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

7.     TAX ON (LOSS) / PROFIT ON ORDINARY ACTIVITIES

       a) Analysis of charge in the year
<TABLE>

                                                                          Year ended     Year ended      Year ended
                                                                         31 December    31 December     31 December
                                                                                2002           2001            2000
                                                                         (pound)'000    (pound)'000     (pound)'000
<S>                                                                             <C>          <C>             <C>
       United Kingdom corporation tax at 30%
                              - current year                                       -          4,643          13,970
                              - prior year                                         -             35             458
                                                                              ------         ------          ------
                                                                                   -          4,678          14,428

       Deferred tax - Timing differences, origination and reversal              (662)         6,208           7,953
                    - Adjustment in respect of prior years                       152              -              54
                                                                              ------         ------          ------
                                                                                (510)         6,208           8,007
                                                                              ------         ------          ------
                                                                                (510)        10,886          22,435
                                                                              ======         ======          ======
</TABLE>

       b) Factors affecting tax charge for the current year

       The tax assessed for the period is higher than that resulting from
       applying the standard rate of corporation tax in the UK (30%) (2001:
       30%) (2000: 30%). The differences are explained below:

<TABLE>

                                                                          Year ended     Year ended      Year ended
                                                                         31 December    31 December     31 December
                                                                                2002           2001            2000
                                                                         (pound)'000    (pound)'000     (pound)'000
<S>                                                                         <C>             <C>            <C>
       (Loss) / profit on ordinary activities before tax                    (771,962)       (38,828)          8,392
                                                                            ========       ========        ========

       Tax on profit on ordinary activities at 30% (2001 & 2000:            (231,589)       (11,648)          2,518
         30%)
       Effects of:
       Expenses not deductible for tax purposes                              214,452         22,068          19,405
       Capital allowances in excess of depreciation                              662         (6,208)         (7,953)
       Tax losses not ultilised                                               16,475            431               -
       Adjustment in respect of prior years                                        -             35             458
                                                                            --------       --------        --------
       Current tax charge for the year                                             -          4,678          14,428
                                                                            ========       ========        ========
</TABLE>


                                      B-9
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

8.     INTANGIBLE FIXED ASSETS

       The intangible fixed assets comprise of goodwill which arose on the
       acquisition of AES Drax Power Limited.

                                                       Goodwill
                                                    (pound)'000
       Cost
       At 1 January 2002                                665,185
       Reclassification                                 (11,206)
                                                        -------

       At 31 December 2002                              653,979
                                                        =======

       Amortisation
       At 1 January 2002                                 70,575
       Charge for the year                               33,876
       Impairment (see Note 4)                          549,528
                                                        -------
       At 31 December 2002                              653,979
                                                        =======
       Net book value
       At 31 December 2002                                    -
                                                        =======
       At 31 December 2001                              594,610
                                                        =======

9.     TANGIBLE FIXED ASSETS

<TABLE>

                                                                               Plant,
                                                              Freehold     machinery,
                                                              land and     fixtures &
                                                             buildings       fittings    Plant spares           Total
                                                           (pound)'000    (pound)'000     (pound)'000     (pound)'000
<S>                                                            <C>          <C>                <C>          <C>
       Cost
       At 1 January 2002                                       132,181      1,081,136          21,011       1,234,328
       Additions                                                     -          2,794           2,430           5,224
       Disposals                                                     -         (2,414)              -          (2,414)
       Issues                                                        -              -            (24)             (24)
                                                             ---------      ---------       ---------       ---------
       At 31 December 2002                                     132,181      1,081,516          23,417       1,237,114
                                                             ---------      ---------       ---------       ---------
       Accumulated depreciation
       At 1 January 2002                                         9,735         83,342           1,006          94,083
       Charge for the year                                       3,209         29,143             502          32,854
       Disposals                                                     -         (2,413)              -          (2,413)
       Impairment (note 4)                                           -         29,472               -          29,472
                                                             ---------      ---------       ---------       ---------
       At 31 December 2002                                      12,944        139,544           1,508         153,996
                                                             ---------      ---------       ---------       ---------
       Net book value
       At 31 December 2002                                     119,237        941,972          21,909       1,083,118
                                                             =========      =========       =========       =========
       At 31 December 2001                                     122,446        997,794          20,005       1,140,245
                                                             =========      =========       =========       =========
</TABLE>


       Freehold land amounting to(pound)1,060,000 (2001:(pound)1,060,000)
       has not been depreciated.


                                     B-10
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

10.    STOCKS
                                                            2002         2001
                                                     (pound)'000  (pound)'000

       Raw materials and consumables                      31,327       62,563
                                                         =======      =======

11.    DEBTORS

                                                            2002         2001
                                                     (pound)'000  (pound)'000
       Amounts due within one year
       Trade debtors                                      52,462      104,849
       Prepayments and other debtors                     827,470      859,097
                                                         -------      -------
                                                         879,932      963,946
                                                         =======      =======

       Amounts due after one year included above
       Other debtors                                     425,000      425,000
                                                         =======      =======

       Other debtors due after one year relate to the forward purchase of
       shares in AES Drax Holdings Limited. The shares will be purchased by AES
       Drax Acquisition Limited when the senior secured debt is repaid in 2015.

       Included within other debtors is a coupon prepayment to Inpower
       of(pound)345.8 million (2001:(pound)360.3 million), VAT receivable
       of(pound)Nil (2001:(pound)1.8 million), deferred financing costs
       of(pound)42.2 million (2001:(pound)48.2 million), a swap advance debtor
       of(pound)1.4 million (2001: swap advance creditor(pound)23.5 million) and
       an insurance debtor of(pound)0.2 million (2001:(pound)0.5 million).

12.    CASH AT BANK AND IN HAND

       Included within the total cash balance are restricted cash deposits
       amounting to (pound)44,818,000 (2001: (pound)25,731,000). These comprise
       part of a required balance which needs to be in place on each repayment
       date.

13.    CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
                                                             2002          2001
                                                      (pound)'000   (pound)'000

       Trade creditors                                     15,222         2,679
       Amounts owed to fellow subsidiary                    1,410           824
       Amounts owed to ultimate parent                     66,401         5,200
       Corporation tax                                      1,204         1,556
       Other creditors and accruals                        54,754        92,449
                                                          -------       -------
                                                          138,991       102,708
                                                          =======       =======

       Included within other creditors is VAT payable of(pound)9.8 million
       (2001:(pound)28.2 million) and accrued interest of (pound)40.9 million
       (2001:(pound)10.1million).


                                     B-11
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

14.    CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
                                                        2002          2001
                                                 (pound)'000   (pound)'000

       Other loans (note 15)                       2,387,274     2,397,779
       Amounts owed to group undertakings:
         Fellow subsidiary undertakings                    -       189,000
         Immediate parent company                    171,000       171,000
       Retentions                                        368           644
                                                   ---------     ---------
                                                   2,558,642     2,758,423
                                                   =========     =========

       Amounts owed to fellow subsidiary undertakings and to the immediate
       parent company have no fixed repayment dates, however the directors have
       indicated that payments will not be requested within one year. No
       interest is payable on these amounts.

       All retentions are payable within 1 to 2 years.

15.    BORROWINGS

       On 2 August 2000, AES Drax Energy Limited issued (pound)135 million
       11.25% senior secured notes due 2010 and $200 million senior secured
       notes due 2010. The net proceeds from the offering of (pound)267 million
       were used to pay certain fees and expenses and to repay the senior
       secured debt. The terms of the notes require the maintenance of certain
       reserves and include limitations on incurring additional debt and on the
       payment of dividends to stockholders.

       The other borrowings at 31 December 2002 consist of Guaranteed Secured
       Bonds. There are two tranches of bonds, the Original Bonds issued on 30
       November, 1999 to finance the acquisition of Drax Power Station by AES
       and a second tranche issued on August 2, 2000, the proceeds from which
       were used to prepay (pound)370 million of interest and the remainder for
       general corporate purposes. The Original Bonds are guaranteed on an
       unlimited, unconditional and irrevocable basis by each of AES Drax Power
       Limited, AES Drax Acquisition Limited, AES Drax Holdings Limited, AES
       Drax Financing Limited and AES Drax Limited and each such entity has
       granted security over all their assets as security for, inter alia, the
       Original Bonds and certain related swaps, finance documents and
       guarantees. The New Bonds are guaranteed on an unlimited, unconditional
       and irrevocable basis by each of AES Drax Power Limited, AES Drax
       Acquisition Limited, AES Drax Holdings Limited, AES Drax Financing
       Limited, AES Drax Limited and AES Drax Electric Limited and each such
       entity has granted security over all their assets as security for, inter
       alia, the New Bonds and certain related swaps, finance documents and
       guarantees.

       Repayment of all of the Guaranteed Secured Bonds is further secured by
       direct agreements from certain of the major project parties and other
       security arrangements.

       The Original Bonds bear a fixed rate of interest of 8.86% and interest
       is payable semi-annually over fifteen years. The New Bonds comprise of
       $302,400,000 of 10.41% senior secured bonds and (pound)200,000,000 of
       9.07% senior secured bonds, maturing on December 31, 2020 and December
       31, 2025 respectively. Interest on the New Bonds is payable
       semi-annually commencing December 31, 2000 for 20 years on the dollar
       bonds and 25 years on the sterling bonds.


                                     B-12
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

15.    BORROWINGS (continued)

                                                         2002           2001
                                                  (pound)'000    (pound)'000
       Analysis of loan repayments are:
       After five years
       Original Bonds                               1,725,000      1,725,000
       New Bonds                                      400,000        400,000
       Senior Secured Notes                           262,274        272,779
                                                    ---------      ---------
                                                    2,387,274      2,397,779
                                                    =========      =========

16.    DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS

       The group issues or holds financial instruments for two purposes.

       o    Financial instruments relating to the operations, financing and
            risks of the operating company, AES Drax Power Limited.

       o    Financial instruments relating to the financing and risks of the
            debt holding companies AES Drax Holdings Limited and AES Drax
            Energy Limited ("the Company"), and the consolidated risks of
            the Group.

       The Group finances its operations by a mix of retained profits, senior
       secured bank debt and senior secured bonds. The Group's financial
       instruments comprise borrowings, cash and liquid resources, items that
       arise directly from its operations and derivative transactions. The main
       risks arising from the Group's financial instruments are interest rate
       risk, currency risk and liquidity risk.

       Interest Rate Risk

       The Group is partly financed by borrowings at both fixed and floating
       rates of interest.

       The Original Bonds require that we enter into hedges against interest
       rate fluctuations on a two-year rolling basis in an amount equal to at
       least 50% of the principal amount of the loans under the Bank Facility.
       The interest amounts due with respect to the remaining principal are
       thus subject to fluctuations in the London interbank offered rate
       (LIBOR). We currently have hedged (pound)565 million of our floating
       rate exposure and such hedging arrangements satisfy the requirements
       under the Original Bonds.

       For the New Bonds, we currently have (pound)132 million of floating rate
       exposure. For the Notes issued by the Company we have no floating rate
       exposure.

       Currency Risk

       The Group is partly financed by borrowings in US Dollars. The Group also
       holds certain US Dollar denominated bank accounts.

       The Group has eliminated the currency risk via cross-currency swaps for
       the $302,400,000 New Bonds issued by AES Drax Holdings Limited in August
       2000. At 31 December 2002, currency swaps covered 100% (2001: 100%) of
       the nominal amount of the US Dollar borrowings and 100% of the interest
       cost of these borrowings (2001: 100%).

       The Group has partially eliminated the currency risk via cross-currency
       swaps for $200,000,000 of Notes issued by AES Drax Energy Limited in
       August 2000. At 31 December 2002, currency swaps covered Nil% (2001:
       20%) of the nominal amount of the US Dollar borrowings.

       There are no material currency risks in the operating company, AES
       Drax Power Limited.


                                     B-13
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

16.    DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)

       Liquidity Risk

       The Group requires access to sufficient liquidity to enable it to meet
       its obligations as they fall due and to provide adequately for
       contingencies.

       For the operating company, AES Drax Power Limited, short-term liquidity
       is provided by a committed bank facility of (pound)15 million (2001:
       (pound)15 million).

       For AES Drax Holdings Limited, short-term liquidity is provided by a
       (pound)52 million letter of credit from Bank of America, which comprises
       part of the Required Balance on the Debt Service Account as stated in
       the Facility Agreement with the senior banks. The cash balance on these
       Debt Service Accounts at 31 December 2002 totalled (pound)44.8 million
       (2001: (pound)9.7 million).

       For AES Drax Energy Limited, short-term liquidity is provided by Debt
       Service Accounts. The cash balance on these Debt Service Accounts at 31
       December 2002 totalled (pound)23,000 (2001: (pound)16,037,000).

       The Generation Business

       Hedging

       The operating company, AES Drax Power Limited, earns a significant
       proportion of its revenues from a Hedging Contract with TXU. This allows
       AES Drax Power Limited to hedge the risks associated with sales of
       electricity as a purely merchant facility, into the Pool, where
       generators are subject to market-related risks, including general
       economic conditions, electricity demand, weather, increasing competition
       and other circumstances beyond their control.

       Numerical Disclosures

       The numerical disclosures below deal with financial assets and
       liabilities as defined in Financial Reporting Standard 13 Derivatives
       and Other Financial Instruments: Disclosures (FRS13). Certain financial
       assets and liabilities, such as investments in subsidiary companies, are
       excluded from the scope of these disclosures. As permitted by FRS13,
       short-term debtors and creditors have been excluded from the
       disclosures.

       Interest rate risk profile of financial assets and financial liabilities

       Financial assets

       The interest rate profile of the Group's financial assets was:
<TABLE>

                                                                                             Financial assets on
                                                                                             -------------------
       Currency              Total              Floating rate       Fixed rate financial     which no interest is
       --------              -----              --------------      ---------------------    --------------------
                                               financial assets             assets                 received
                                               ----------------             ------                 --------
                        31          31          31          31          31          31          31           31
                        --          --          --          --          --          --          --           --
                      December   December    December    December    December    December     December    December
                      --------   --------    --------    --------    --------    --------     --------    --------
                       2002        2001        2002        2001        2002        2001        2002         2001
                       ----        ----        ----        ----        ----        ----        ----         ----
                   (pound)000's(pound)000's(pound)000's(pound)000's(pound)000's(pound)000's(pound)000's (pound)000's
<S>                     <C>         <C>         <C>         <C>           <C>        <C>         <C>         <C>
       Sterling         85,000      60,235      85,000      60,235           -           -            -           -
       Dollar               87       4,325          87       4,325           -           -            -           -

                     -----------------------------------------------------------------------------------------------
       Total            85,087      64,560      85,087      64,560           -           -            -           -
</TABLE>

       The Group's financial assets comprise of deposits bearing interest at
       the rate agreed between the Group and its banks.


                                     B-14
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

16.    DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)

       Financial Liabilities

       After taking account of the various currency and interest rate swaps
       entered into by the Group, the interest rate profile of the Group's
       financial liabilities was:
<TABLE>

         Currency            Total              Floating rate       Fixed rate financial    Financial liabilities
         --------            -----              --------------      ---------------------   ----------------------
                                             financial liabilities       liabilities         on which no interest
                                             ---------------------       -----------         --------------------
                                                                                                    is paid
                                                                                                    -------
                         31          31          31         31          31          31          31           31
                         --          --          --         --          --          --          --           --
                      December    December    December   December    December    December    December     December
                      --------    --------    --------   --------    --------    --------    --------     --------
                        2002        2001        2002       2001        2002        2001        2002         2001
                        ----        ----        ----       ----        ----        ----        ----         ----
                 (pound)000's(pound)000's(pound)000's(pound)000's(pound)000's(pound)000's(pound)000's (pound)000's
<S>                  <C>         <C>          <C>         <C>        <C>        <C>           <C>         <C>
         Sterling    2,260,000   2,260,000    866,775     808,815    968,225    1,026,185     425,000     425,000
          Dollar       127,274     137,779        -           -      127,274      137,779         -           -
                     -----------------------------------------------------------------------------------------------
          Total      2,387,274   2,397,779    866,775     808,815   1,095,499   1,163,964     425,000     425,000
</TABLE>

<TABLE>

         Currency          Fixed rate financial liabilities         Financial liabilities on which no interest is
         --------          --------------------------------         ----------------------------------------------
                                                                                         paid
                                                                                         ----

                      Weighted average interest       Weighted average period for       Weighted average period
                      --------------------------      ----------------------------      -----------------------
                                 rate                     which rate is fixed                until maturity
                                 ----                     -------------------                --------------
                          31             31               31               31               31             31
                          --             --               --               --               --             --
                       December       December         December         December         December       December
                       --------       --------         --------         --------         --------       --------
                         2002           2001             2002             2001             2002           2001
                         ----           ----             ----             ----             ----           ----
                          %               %             Years            Years      (pound)000's   (pound)000's
<S>                     <C>             <C>              <C>              <C>              <C>            <C>
         Sterling       9.271           9.229            15.3             15.7             15.3           15.7
          Dollar        10.955         10.996            15.3             15.7             15.3           15.7
</TABLE>

       The floating rate liabilities comprise Original Bonds of
       pound)734,775,000 (2001: (pound)676,815,000) and New Bonds of
       pound)132,000,000 (2001: (pound)132,000,000) that bear interest at
       ates based upon LIBOR for terms of up to six months.

       The fixed rate liabilities comprise Original Bonds of(pound)565,225,000
       (2001:(pound)623,815,000), New Bonds of (pound)268,000,000
       (2001:(pound)268,000,000) and Notes of(pound)262,274,000
       (2001:(pound)272,779,000) that bear interest rates set under the terms of
       the bonds.

       The financial liability on which no interest is paid is the forward
       purchase of shares by AES Drax Acquisition Limited.

       Maturity of financial liabilities

       The maturity profile of the Group's financial liabilities was as follows:

<TABLE>
                                                                      Borrowings
                                                                  31            31
                                                                  --            --
                                                               December      December
                                                                 2002          2001
                                                                 ----          ----
                                                             (pound)000's  (pound)000's
<S>                                                            <C>          <C>
       In one year or less, or on demand                           -            -
       In more than one year but not more than two years           -            -
       In more than two years but not more than five years         -            -
       In more than five years                                 2,387,274    2,397,779
</TABLE>


                                     B-15
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

16.    DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)

       Fair Value Disclosures

       Set out below is a comparison of book values and fair values of the
       Group's financial assets and liabilities.

<TABLE>
                                                                      31 December 2002           31 December 2001
                                                                      ----------------           ----------------
                                                                      Book          Fair         Book         Fair
                                                                      ----          ----         ----         ----
                                                                      Value        Value         Value        Value
                                                                      -----        -----         -----        -----
                                                                  (pound)000's  (pound)000's (pound)000's (pound)000's
<S>                                                                <C>           <C>          <C>          <C>
       Financial assets
       Bank deposits                                                  85,087        85,087       64,560       64,560

       Primary financial instruments issued to finance the
       Group's operations
       Long-term borrowings                                        2,387,274     1,858,582    2,397,779    2,096,715

       Derivative  financial  instruments  held to  manage  the
       interest rate and currency profile
       Interest rate swaps                                                 -       (75,870)           -      (46,983)
       Currency swaps                                                      -         7,812            -       13,111
</TABLE>

       The fair values of financial assets have been determined by reference
       to quoted market prices where available. The estimated difference
       between the book and fair value of such assets is not material.

       The fair value of the long-term borrowings have been determined by
       reference to either a quoted market value or, the fair values of the
       unquoted debt have been calculated by discounting the estimated cash
       flows for each instrument at the appropriate market discount rate, in
       effect at the balance sheet date.

       The fair value of the currency swaps and sterling and US Dollar
       denominated bonds have been determined by reference to prices available
       from the markets on which these instruments or similar instruments are
       traded.

       Gains and losses on financial assets and financial liabilities held or
       issued for trading

       No gains or losses have been recognised which relate to trading in
       financial assets and financial liabilities.


                                     B-16
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


16.    DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (continued)

       Gains and losses on hedges

       The Group enters into CFDs, EFAs and similar contracts to hedge against
       fluctuations in the selling price for electricity obtained from the
       Pool. It also uses interest rate swaps and currency swaps to manage its
       interest rate profile and currency risk. Changes in the fair value of
       instruments used as hedges are not recognised in the financial
       statements until the hedged position matures. An analysis of
       unrecognised gains and losses is as follows:

<TABLE>
                                                            Gains                Losses             Total Net
                                                            -----                ------             ----------
                                                         (pound)000's         (pound)000's         (pound)000's
<S>                                                         <C>                  <C>                  <C>
       Unrecognised gains and losses on hedges at 1
       January 2002                                         13,519               (47,391)             (33,872)
       Gains and losses arising in previous years
       that were recognised in the year                    (13,519)               47,391               33,872
                                                       -------------------------------------------------------------
       Gains and losses arising before 1 January
       2002 that were not recognised in the year                 -                     -                    -
       Gains and losses arising in the year that
       were not recognised in the year                       7,812               (75,870)             (68,058)
                                                       -------------------------------------------------------------
       Unrecognised gains and losses at 31 December
       2002                                                  7,812               (75,870)             (68,058)
                                                       =============================================================
       Gains and losses expected to be recognised in
       the next financial year                                   -                     -                    -
       Gains and losses expected to be recognised
       after the next financial year                         7,812               (75,870)             (68,058)
                                                       =============================================================
</TABLE>


17.    PROVISIONS FOR LIABILITIES AND CHARGES
                                         At         Current              At
                                  1 January            year     31 December
                                       2002          credit            2002
                                (pound)'000     (pound)'000     (pound)'000

       Deferred taxation             17,278           (510)          16,768
       Reinstatement provision          110              -              110
                                     ------         ------           ------
                                     17,388           (510)          16,878
                                     ======         ======           ======


       The amounts of deferred taxation provided and unprovided in the financial
       statements are:

<TABLE>
                                                                   2002                            2001
                                                          Provided    Not provided        Provided    Not provided
                                                       (pound)'000     (pound)'000     (pound)'000     (pound)'000
<S>                                                         <C>                 <C>         <C>                 <C>
       Capital allowances in excess of depreciation         16,768               -          17,278               -
                                                            ======          ======          ======          ======
</TABLE>


                                     B-17
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

18.    CALLED UP SHARE CAPITAL
                                                              2002         2001
                                                       (pound)'000  (pound)'000

       Authorised
         1,000,000,000 ordinary shares of(pound)1 each   1,000,000    1,000,000
                                                         =========    =========

       Called up, allotted and fully paid
         1,000,000 ordinary shares of(pound)1 each           1,000        1,000
                                                         =========    =========

19.    PROFIT AND LOSS ACCOUNT

                                                                    (pound)'000

       At 1 January 2002                                                (53,595)
       Retained loss for the financial year                            (771,452)
       Other reserve movement                                           189,000
                                                                       --------
       At 31 December 2002                                             (636,047)
                                                                       ========

       The other reserve movement relates to an accounting difference arising
       on group reconstruction within the year.

20.    RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
                                                                    (pound)'000

       Loss for the financial year                                     (771,452)
       Other reserve movement                                           189,000
                                                                       --------
       Net reduction in shareholders' funds                            (582,452)
       Opening shareholders' funds                                      (52,595)
                                                                       --------
       Closing shareholders' funds                                     (635,047)
                                                                       ========

21.    RECONCILIATION OF OPERATING (LOSS) / PROFIT TO NET CASH INFLOW FROM
       OPERATING ACTIVITIES

<TABLE>
                                                              2002           2001           2000
                                                       (pound)'000    (pound)'000    (pound)'000
<S>                                                       <C>             <C>            <C>
       Operating (loss) / profit                          (589,399)       142,739        173,518
       Depreciation                                         32,854         32,503         31,937
       Amortisation of goodwill                             33,876         33,876         33,876
       Loss on disposal of fixed assets                          -             19              -
       Plant spares issues                                      24            155              -
       Amortisation of deferred financing costs              5,947          6,031          4,606
       Amortisation of coupon prepayment                    14,457         13,265              -
       Utilisation of unfavourable contract provision            -        (17,789)       (25,188)
       Decrease / (increase) in stocks                      31,236         (2,617)        (7,413)
       Decrease / (increase) in debtors                     63,665         76,025       (116,253)
       Increase / (decrease) in creditors                    6,287        (80,867)        45,708
       Impairment of fixed assets                          579,000              -              -
                                                           -------        -------        -------
                                                           177,947        203,340        140,791
                                                           =======        =======        =======
</TABLE>


                                     B-18
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

22.    RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

<TABLE>
                                                             2002           2001            2000
                                                      (pound)'000    (pound)'000     (pound)'000
<S>                                                    <C>            <C>             <C>
       Increase / (decrease) in cash in the year            1,440         (7,986)         (6,907)
       Increase in restricted cash deposits                19,087          1,225          24,476
       Cash outflow from increase in debt financing             -              -        (417,773)
       Translation difference                                   -              -            (286)
                                                       ----------     ----------      ---------
       Movement in net debt in the year                    20,527         (6,761)       (400,490)
       Net debt brought forward                        (2,328,499)    (2,321,768)     (1,921,278)
                                                       ----------     ----------      ---------
       Net debt at carried forward                     (2,307,972)    (2,328,499)     (2,321,768)
                                                       ==========     ==========      ==========

</TABLE>

23.    ANALYSIS OF CHANGES IN NET DEBT


                                             At 1    Cash flow         At 31
                                          January                   December
                                             2002                       2002
                                      (pound)'000  (pound)'000   (pound)'000

       Cash at bank and in hand            38,829        1,440        40,269
       Restricted cash deposits            25,731       19,087        44,818
                                       ----------   ----------    ----------
                                           64,560       20,527        85,087

       Other loans                     (2,393,059)           -    (2,393,059)
                                       ----------   ----------    ----------
                                       (2,328,499)      20,527    (2,307,972)
                                       ==========   ==========    ==========

24.    PENSION SCHEME FUNDING

       Pension schemes operated

       Within the UK the Group principally operates an approved defined benefit
       scheme, on behalf of the 'AES Drax Power Group of the Electricity Supply
       Pension Scheme' (ADPG ESPS).

       Regular pension costs - SSAP 24

       Pensions costs for the ADPG ESPS in the year were (pound)1,700,000
       (2001: (pound)1,469,000), comprising a regular cost of (pound)1,500,000
       (2001: (pound)1,200,000) plus variations totalling (pound)200,000 (2001:
       (pound)(200,000)). A variation of (pound)(100,000) has arisen due to
       (pound)800,000 of the valuation surplus being carried forward
       unutilised, which is being spread as a level percentage of salaries over
       the average remaining working life of the membership (approximately 11
       years). A further variation of (pound)(100,000) has arisen due to the
       application of reduced contributions from 1 January 2002 to 31 March
       2002 from the valuation surplus. The remaining variation of
       (pound)400,000 has arisen due to certain special events, generating
       additional liabilities and triggering employer contributions. In the
       year, redundancies have resulted in an additional pension cost of
       (pound)400,000, which has been partially offset by additional employer
       contributions of (pound)200,000.


                                     B-19
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

24.    PENSION SCHEME FUNDING (continued)

       The scheme actuary, an employee of Bacon & Woodrow, Actuaries and
       Consultants, assessed the ESPS in respect of the AES Drax Power Group as
       at 31 December 2002 using the projected unit method and a market based
       valuation approach to ascertain its cost to the Group. The principal
       financial assumptions were that the rate of return would be 4.5% per
       annum higher than the rate of price inflation, that increases in past
       and future pensions would be in line with price inflation, and that
       future salary growth would exceed price inflation by 2.75% per annum,
       depending on salary levels at the valuation date. Following the
       actuarial valuation it was agreed that the Group would pay an average
       contribution rate of 12% of annual salaries, subject to review at future
       valuations.

       At the date of the latest actuarial valuation the market value of the
       assets of the ADPG ESPS was (pound)44.6 million and the actuarial value
       of the assets was sufficient to cover between 115% and 120% of the
       benefits that had accrued to members, after allowing for expected
       increases in future earnings. The next scheduled actuarial valuation of
       the ADPG ESPS will be as at 31 March 2004.

       FRS 17

       In November 2000 the Accounting Standards Board issued FRS 17
       'Retirement Benefits' replacing SSAP 24 'Accounting for Pensions Costs'.
       Certain disclosures are required in the transition period before full
       adoption of FRS 17 for periods ending on or after 22 June 2001. These
       further disclosures are included below.

       The actuarial valuation of the ADPG ESPS was updated to 31 December
       2002. The principal actuarial assumptions used as at 31 December 2002
       are shown below:

                                                                2002        2001
       Rate of increase in salaries                             3.8%        4.0%
       Rate of increase of pensions in payment and deferment    2.5%        2.6%
       Discount rate                                            5.4%        5.8%
       Inflation assumption                                     2.3%        2.5%

       The following contributions were made to the ADPG ESPS during 2002:

                                                   Year ended
                                                  31 December
                                                         2002
                                             (pound)'millions

       Company contributions                              1.6
       Member contributions                               0.6
                                                       ======

       Analysis of amount charged to Operating Profit:

                                                   Year ended
                                                  31 December
                                                         2002
                                            (pound)' millions

       Current service cost                               1.9
       Past service cost                                    -
       Early Retirement Deficiency cost                   0.4
                                                       ------
       Total Operating cost                               2.3
                                                       ======


                                     B-20
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


24.    PENSION SCHEME FUNDING (continued)

       Analysis of amount credited to other finance income:

                                                   Year ended
                                                  31 December
                                                         2002
                                            (pound)' millions

       Expected return on pension plan assets             3.3
       Less: Interest on pension plan liabilities        (3.2)
                                                       ------
       Net return                                         0.1
                                                       ======

       The assets and liabilities of the ADPG ESPS as at 31 December 2002 are
       shown below:

                                                         2002              2001
                                            (pound)' millions  (pound)'millions

       Market value of assets                            35.8              43.4

       Actuarial value of liabilities                   (60.8)            (53.9)
                                                       ------            ------
       Deficit in the Scheme                            (25.0)            (10.5)
       Related deferred tax liability
        (assumed 30% rate)                                7.5               3.2
                                                       ------            ------
       Net pension liability                            (17.5)             (7.3)
                                                       ======            ======

       Analysis of movement in surplus during the year:

                                                   Year ended
                                                  31 December
                                                         2002
                                            (pound)' millions

       Surplus in scheme at 1 January 2002              (10.5)
       Current service cost                              (1.9)
       Contributions                                      2.2
       Early Retirement Deficiency cost                  (0.4)
       Actuarial gain/(loss)                            (14.4)
                                                       ------
       Surplus in scheme at 31 December 2002            (25.0)
                                                       ======


                                     B-21
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

24.    PENSION SCHEME FUNDING (continued)

       Analysis of amount recognised in Statement of Total Recognised Gains and
       Losses:
<TABLE>
                                                                             Year ended
                                                                            31 December
                                                                                   2002
                                                                      (pound)' millions
<S>                                                                              <C>
       Actual return less expected return on pension scheme assets               (11.8)
       Experience gains/(losses) arising on the scheme liabilities                 0.1
       Changes in  assumptions  underlying  the present  value of the scheme
       liabilities                                                                (2.7)
                                                                               -------

       Actuarial gain/(loss) recognised in STRGL                                 (14.4)
                                                                               =======
</TABLE>

       Had the company adopted FRS 17 early, Group profit and loss reserves
       would have been stated as follows:

<TABLE>
                                                                                             2002                2001
                                                                                (pound)' millions   (pound)' millions
<S>                                                                                        <C>                  <C>
       Profit and loss reserve in the financial statements as at year end                  (636.0)              (53.6)

       Deficit in relation to the ADPG ESPS, net of related deferred tax asset              (17.5)               (7.3)
                                                                                          -------              ------

       Profit and loss reserve as adjusted                                                 (653.5)              (60.9)
                                                                                           ======              ======
</TABLE>

25.    FINANCIAL COMMITMENTS

       In connection with the acquisition of the Drax Power Station, AES Drax
       Power Limited assumed an unfavourable contract to purchase coal for the
       plant. The agreement expired in September 2001. Of the total contract,
       (pound)17,789,000 relates to the estimated unfavourable purchase
       element.

26.    ULTIMATE PARENT COMPANY

       The immediate parent company is AES UK Power Financing Limited, a
       company registered in England and Wales.

       The ultimate parent company and controlling entity is The AES
       Corporation, a company incorporated in the State of Delaware, USA.
       Copies of the parent company's financial statements can be obtained
       from the Securities and Exchange Commission, 450 5th Street NW,
       Washington DC 20549, USA.

27.    NATURE OF BUSINESS

       The principal activity of the company and its subsidiaries is the
       ownership and operation of the Drax Power Plant, a 3,960 megawatt
       (gross) coal-fired power station based in the North of England.


                                     B-22
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

28.    SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP

       This note is provided in addition to the previous financial information
       for US users of the accounts.

       The financial statements are prepared in accordance with UK GAAP, which
       differ in certain significant respects from US GAAP. These differences
       relate principally to the following items and the approximate effect on
       net income and shareholders' equity is shown in the following table.

       Deferred taxation

       Under UK GAAP, deferred taxation is provided at the anticipated tax
       rates on timing differences arising from the inclusion of items of
       income and expenditure in taxation computations in periods different
       from those in which they are included in the financial statements, to
       the extent that it is probable that an asset or a liability will
       crystallise in the foreseeable future, in accordance with FRS 19. Under
       US GAAP, deferred taxation is provided on all temporary differences
       under the liability method, subject to a valuation allowance where
       applicable in respect of deferred taxation assets, in accordance with
       SFAS 109, Accounting for Income Taxes.

       Additional net deferred tax liabilities recorded at the acquisition date
       under US GAAP resulted in an increase in the amount allocated to
       tangible fixed assets resulting in additional depreciation expense.

       Pensions

       The directors do not believe the adoption of FAS 87 costs would differ
       materially from the pension costs under UK GAAP. Under US GAAP, FAS 87
       requires the recording of an additional minimum pension obligation under
       certain circumstances. No such obligation is required under UK GAAP.

       Interest

       Under UK GAAP, interest is charged on the (pound)1,725 million
       Guaranteed Secured Bonds. Under US GAAP, (pound)425 million forward
       purchase of equity is offset against the (pound)1,725 million Guaranteed
       Secured bond. Therefore, interest under US GAAP is charged on the net
       (pound)1,300 million.

       The (pound)1,300 million represents a senior secured bank facility.
       Repayment of the bank facility is secured by a security interest in the
       (pound)1,725 million Guaranteed Secured Bonds. Enforcement of the bank
       facility will give the bank lenders the right to enforce the security
       package granted under the Guaranteed Secured Bonds. Interest on the bank
       facility accrues at LIBOR + 1.8%. Principal repayments are due
       semi-annually over a fifteen year period commencing 30 June 2000.
       Principal repayments of (pound)25.0 million, (pound)370.0 million,
       (pound)2.7 million, (pound)9.1 million, (pound)22.6 million and
       (pound)28.1 million were made on 30 June 2000, 2 August 2000, 31
       December 2000, 30 June 2001, 31 December 2001 and 30 June 2002,
       respectively.

       Goodwill

       Under UK GAAP, goodwill arising on the acquisition of subsidiaries
       represents the excess of the fair value of the consideration given over
       the fair value of the identifiable net assets acquired. Goodwill is
       capitalised and amortised over twenty years. Under US GAAP, the
       acquisition has been treated as an acquisition of assets and accordingly
       the entire purchase price, including certain liabilities assumed, has
       been allocated to tangible fixed assets and depreciated over the
       estimated useful lives of the assets, being thirty five years. Under UK
       GAAP, the Company has recorded an impairment loss measured by reference
       to the value in use of the assets. Under US GAAP, an impairment loss on
       the tangible fixed assets is recorded only if the assets are not
       recoverable from their undiscounted cash flows. No impairment had been
       recognised under US GAAP.

       Severance accrual

       Under US GAAP, an accrual would be recorded as part of the acquisition
       of AES Drax Power Limited for the estimated cost of severing certain
       employees of AES Drax Power Limited. No such accrual has been recorded
       under UK GAAP.

       Derivative Instruments and Hedging Activities

       In order to comply with US GAAP, adjustments are required to be made in
       relation to SFAS 133, Accounting for Derivative Instruments and Hedging
       Activities. This results in the creation of derivative assets and
       liabilities, together with corresponding gains and losses on all
       derivative instruments and hedges.


                                     B-23
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002


28. SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)

<TABLE>
                                                               Three months ended                  Year ended
                                                                      31          31           31          31          31
                                                                December    December     December    December    December
                                                                    2002        2001         2002        2001        2000
                                                             (pound)'000 (pound)'000  (pound)'000 (pound)'000 (pound)'000
<S>                                                            <C>          <C>         <C>             <C>        <C>
      Net loss under UK GAAP                                   (729,745)    (19,803)    (771,452)    (49,714)    (14,043)
      US GAAP adjustments:
           Goodwill                                              (2,737)      8,469       33,876      33,876      33,876
           Additional depreciation                               (4,838)     (4,838)     (19,350)    (19,350)    (19,350)
           Deferred tax                                            (749)      5,293       22,952      14,978      12,303
           Additional depreciation due to deferred tax           (5,081)     (5,081)     (20,326)    (20,326)    (20,326)
           Severance pay expensed in the UK                           -           -            -           -      12,053
           Interest                                              12,868      11,255       48,371      43,874      44,920

           Unfavourable IT contract                                   -           -            -           -       1,995
           Derivative loss                                       (1,804)     (6,070)        (354)    (15,985)      3,995
           Impairment of fixed assets                           579,000           -      579,000           -           -
                                                               --------     -------     --------     -------      ------
      Net (loss) / income under US GAAP                        (153,086)    (10,775)    (127,283)    (12,647)     55,423
                                                               ========     =======     ========     =======      ======
</TABLE>
                                                             2002          2001
                                                      (pound)'000   (pound)'000

      Shareholders' deficit under UK GAAP                (635,047)      (52,595)
      US GAAP adjustments:
          Cumulative effect of previous adjustments        72,332        72,454
          Goodwill                                         33,876        33,876
          Additional depreciation                         (19,350)      (19,350)
          Deferred tax                                     22,952        14,978
          Additional depreciation due to deferred tax     (20,326)      (20,326)
          Interest                                         48,371        43,874
          Derivatives                                      (1,324)      (53,174)
          Impairment of fixed assets                      579,000             -
                                                          -------       -------
      Shareholders' equity under US GAAP                   80,484        19,737
                                                          =======       =======

       The US GAAP adjustment for deferred taxes would result in an increase in
       long term assets under US GAAP of (pound)649 million and (pound)669
       million and an increase in long term liabilities under US GAAP of
       (pound)549 million and (pound)682 million, at 31 December 2002 and 31
       December 2001, respectively.

       The US GAAP adjustment to reflect the substance of the financing
       structure would result in a decrease in current assets under US GAAP of
       (pound)425 million at 31 December 2002 and 31 December 2001. It would
       also result in a decrease in long term liabilities under US GAAP of
       (pound)931 million and (pound)913 million and an increase in current
       liabilities under US GAAP of (pound)49 million and (pound)59 million, at
       31 December 2002 and 31 December 2001, respectively.

       Under US GAAP, an additional long-term obligation of (pound)11 million
       would be recorded for minimum pension obligations.


                                     B-24
<PAGE>

AES DRAX POWER FINANCE HOLDINGS LIMITED


NOTES TO THE ACCOUNTS
Year ended 31 December 2002

28.    SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP (continued)

       A reconciliation of the consolidated cash flow statement prepared under
       UK GAAP to a statement of cash flows prepared under US GAAP is as
       follows:

<TABLE>
                                                                          Year ended       Year ended       Year ended
                                                                         31 December      31 December      31 December
                                                                                2002             2001             2000
                                                                         (pound)'000      (pound)'000      (pound)'000
<S>                                                                          <C>              <C>              <C>
       Net cash inflow from operating activities                             177,946          203,340          140,791
       Returns on investments and servicing of finance                      (151,847)        (194,820)        (142,041)
       Taxation                                                                 (348)          (9,161)         (19,196)
                                                                         -----------      -----------      -----------

       Net cash flows provided by / (used in) operating activities
        per US GAAP                                                           25,751             (641)         (20,446)
                                                                         -----------      -----------      -----------

       Capital expenditure                                                    (5,224)          (6,090)          (6,493)
       Increase in restricted cash deposits                                  (19,087)          (1,255)         (24,476)
                                                                         -----------      -----------      -----------
       Net cash used in investing activities per US GAAP                     (24,311)          (7,345)         (30,969)
                                                                         -----------      -----------      -----------

       New borrowings                                                              -                -          668,059
       Repayment of borrowing                                                      -                -         (250,000)
       Prepayment of coupons                                                       -                -         (373,551)
                                                                         -----------      -----------      -----------
                                                                                   -                -           44,508
                                                                         ===========      ===========       ==========

       Increase / (decrease) in cash                                           1,440           (7,986)          (6,907)
       Increase in restricted cash                                            19,087            1,255           24,476
        deposits
       Cash brought forward                                                   64,560           71,291           53,722
                                                                         -----------      -----------      -----------
       Cash carried forward                                                   85,087           64,560           71,291
                                                                         ===========      ===========       ==========
</TABLE>

       Comprehensive income / (loss) under US GAAP is as follows:
<TABLE>

                                                                          Year ended       Year ended       Year ended
                                                                         31 December      31 December      31 December
                                                                                2002             2001             2000
                                                                         (pound)'000      (pound)'000      (pound)'000
<S>                                                                         <C>               <C>               <C>
       Net (loss) / income under US GAAP                                    (127,283)         (12,647)          55,423

       Derivative gain / (loss)                                                 (970)         (37,189)              -
       Minimum pension obligation                                             (7,560)               -               -
                                                                         -----------      -----------      -----------
       Comprehensive (loss) / income                                        (135,813)         (49,836)          55,423
                                                                         ===========      ===========       ==========
</TABLE>

                                     B-25