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

                                    FORM 10-K
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1999
                        Commission file number 333-89725

                            AES Eastern Energy, L.P.
             (Exact name of registrant as specified in its charter)



Delaware                                                      54-1920088
(State or other jurisdiction of                              (I.R.S.  Employer
incorporation or organization)                               Identification No.)

1001 North 19th Street
Arlington, Virginia                                            22209
(Address of principal executive offices)                     (Zip Code)

        Registrant's telephone number, including area code: 703-522-1315

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

                              (Title of each class)

                                 ---------------

         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      No X
                                   -----   ----

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

                                 ---------------

         Registrant is a wholly owned subsidiary of The AES Corporation.
Registrant meets the conditions set forth in General Instruction I(1)(a) and (b)
of Form 10-K and is filing this Annual Report on Form 10-K with the reduced
disclosure format authorized by General Instruction I.



                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None


<PAGE>


Item 1.  Business

         (a) General Development of Business

         Our company is a Delaware limited partnership. Our company was formed
on December 2, 1998 as an indirect wholly owned subsidiary of The AES
Corporation to take part in the acquisition by subsidiaries of The AES
Corporation of six coal-fired electricity generating stations and related assets
located in the western and west central part of New York State. AES NY, L.L.C.
is the sole general partner of our company and AES NY2, L.L.C. is the sole
limited partner of our company. The AES Corporation owns indirectly all of the
member interests in both AES NY, L.L.C. and AES NY2, L.L.C. The mailing address
of our principal executive offices is 1001 North 19th Street, Arlington,
Virginia 22209, telephone no. (703) 522-1315.

         New York State Electric & Gas Corporation and its affiliate NGE
Generation, Inc. (whom we refer to collectively as "NYSEG") sold these six
electricity generating stations and related assets as part of NYSEG's overall
plan to divest itself of its coal-fired electricity generating assets. NYSEG and
many other integrated electric utilities in New York and elsewhere in the United
States have announced plans to sell electricity generating assets in response to
state regulatory initiatives which favor more decentralized ownership of
electricity generating, transmission and distribution assets. The purchase of
these assets from NYSEG is an element of The AES Corporation's overall strategy
to be a major participant in the newly competitive and deregulated markets for
electricity, principally through the purchase of strategically significant
regional generating assets.

         On May 14, 1999, twelve special purpose business trusts formed by three
institutional investors that are not affiliated with us or with The AES
Corporation acquired from NYSEG and leased to us the assets constituting the
Somerset Generating Station (formerly known as the Kintigh Generating Station)
and the Cayuga Generating Station (formerly known as the Milliken Generating
Station), excluding the real property on which they are located. On that date,
we acquired from NYSEG the real property on which the Somerset Generating
Station and the Cayuga Generating Station are located and two additional
coal-fired electricity generating stations, the Westover Generating Station
(formerly known as the Goudey Generating Station) and the Greenidge Generating
Station (together with the real property upon which they are located). We leased
a portion of the real property on which the Somerset Generating Station and the
Cayuga Generating Station are located and a selective catalytic reduction
system, which reduces emissions of nitrogen oxides, that was then being
installed at the Somerset Generating Station to the special purpose business
trusts, which subleased them back to us. As part of the transaction, another
subsidiary of The AES Corporation that we do not control acquired the stock of
the Somerset Railroad Corporation, which owns short line railroad assets used to
transport coal to the Somerset Generating Station. Somerset Railroad entered
into a coal hauling agreement with us to transport coal. Another subsidiary of
The AES Corporation that we do not control acquired the balance of the assets
that were purchased from NYSEG, consisting of two older, coal-fired electricity
generating stations, the Jennison Generating Station and the Hickling Generating
Station.

         We operate our electricity generating stations through our wholly owned
subsidiaries. The Westover Generating Station and the Greenidge Generating
Station are owned by a wholly owned subsidiary, AEE2, L.L.C. Our other
subsidiaries do not own any of our electricity generating stations but operate
them pursuant to operations and maintenance agreements with us.

         We wish to caution readers that our business and operations involve
risks and uncertainties, including the following important factors. These
factors should be considered when reviewing our business, financial condition,
results of operations and future prospects, and are relied upon by us in issuing
any forward-looking statements. Such factors could affect our actual operating
results and cause such results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, us. Some or all of these
factors may apply to our business as currently conducted or as we intend to
conduct it.

         o  The market in which our business is concentrated has been recently
            deregulated and there is no long-term historical price data that
            shows we will be able to sell our electric energy, installed
            capacity and ancillary services at prices that will permit us to pay
            our expenses.

         o  We will be required to make substantial payments under our leases
            and other contracts and we may have difficulty responding to
            unforeseen requirements.


<PAGE>


         o  We may have difficulty meeting our payment obligations if our
            operations are not as successful as we have projected.

         o  Operation of our stations might be disrupted by: interruptions in
            fuel supply; disruptions in electrical transmission; facility
            shutdown due to breakdowns or failures of equipment or processes,
            violations of permit requirements, operator error or catastrophic
            events; or labor disputes.

         o  Our electricity generating stations are not new and will require
            careful maintenance if they are to operate efficiently.

         o  We may have trouble meeting our obligations if our electricity
            generating stations are not dispatched nearly continually.

         o  An increase in the real price of coal will negatively affect our
            operating results.

         o  We have only a limited operating history and we have not
            demonstrated that we can operate our electricity generating stations
            in a profitable manner on a long-term basis.

         o  Our business is extensively regulated and new regulations may impose
            requirements that we are unable to meet or that require us to make
            additional expenditures.

         o  We have responsibility for environmental liabilities that existed
            prior to our ownership of our electricity generating stations and we
            will incur expenses as a result. These expenses may exceed our
            estimates.

         o  We may be subject to significant new restrictions on emissions which
            may force us to restrict our operations or incur significant
            expenses.

         o  Under the Asset Purchase Agreement with NYSEG relating to the
            acquisition of our electricity generating stations, we have assumed
            liabilities of NYSEG that could result in unexpected expenses and we
            have given up the right to make claims for problems we may discover
            later.

         o  We or our affiliates may have to defend lawsuits relating to
            asbestos exposure at our electricity generating stations while they
            were owned by NYSEG and damages in those suits or the cost of
            defending them could be material.

         o  We are controlled by The AES Corporation and The AES Corporation may
            pursue its own interests to the detriment of our creditors and
            holders of pass through trust certificates issued to finance the
            acquisition of the Somerset Generating Station and the Cayuga
            Generating Station.

         o  The AES Corporation is not obligated to provide further funding to
            us if we are unable to pay our obligations.

         o  We expect that two senior members of our management team, Dan
            Rothaupt and John Ruggerillo, will devote a portion of their time to
            other projects for The AES Corporation.

         o  In the future we might compete with other electricity generating
            stations owned by The AES Corporation.

               (b) Financial Information About Industry Segments

               We operate in only one business segment, electrical generation.

               (c) Narrative Description of Business

               A diagram of the corporate structure of The AES Corporation as it
relates to our company is included below:


                                       2
<PAGE>


                               The AES Corporation
                                       |
                                       |
                                  AES New York
                                Funding, L.L.C.
                                       |
                                       |
           ---------------------------------------------------------------
           |                                               |              |
           |                                               |              |
     AES NY2, L.L.C.                              AES NY, L.L.C.      AES, NY3,
    (Limited Partner)                            (General Partner)     L.L.C.
           |                                               |              |
           |                                               |              |
           -------------------------------------------------              |
                      |                              |                    |
                      |                              |                    |
                      |                              |                    |
               AES Eastern                      AES Creative          Somerset
               Energy, L.P.                   Resources, L.P.         Railroad
                      |                              |                  Corp.
                      |                              |
    --------------------------------          ---------------
    |               |              |          |              |
    |               |              |          |              |
   AES             AES          AEE 2,       AES            AES
 Somerset,        Cayuga,       L.L.C.     Jennison,      Hickling,
  L.L.C.          L.L.C.           |         L.L.C.         L.L.C.
(Kintigh)        (Milliken)        |
                                   |
                             ------------
                             |           |
                             |           |
                            AES         AES
                         Westover,    Greenidge,
                           L.L.C.       L.L.C.
                         (Goudey)     (Greenidge)


         The AES Corporation

         The AES Corporation, incorporated under the laws of Delaware in 1981
and headquartered in Arlington, Virginia, is a global power company committed to
supplying electricity to customers worldwide in a socially responsible way. In
addition to marketing power principally from generating facilities that it
develops, builds, owns, and operates, The AES Corporation also has interests in
electric distribution companies. These distribution companies sell electricity
directly to commercial, industrial, governmental and residential customers. The
AES Corporation currently has assets in excess of $21 billion and employs
approximately 54,000 people around the world.

         The AES Corporation and its affiliates, other than our company, will
not be liable for any of our obligations, including our obligations under the
leases for the Somerset Generating Station and the Cayuga Generating Station.
The AES Corporation and its affiliates also will not be liable for any
obligations under the pass through trust certificates issued to finance the
acquisition of the Somerset Generating Station or the Cayuga Generating Station
or the secured lease obligation notes issued by the special purpose business
trusts that own those electricity generating stations.

         Strategy

         The AES Corporation's strategy of helping meet the world's needs for
electricity includes the following elements:

         o  Supplying energy to customers at the lowest cost possible, taking
            into account factors such as reliability and environmental
            performance;

         o  Constructing or acquiring projects of a relatively large size
            (generally larger than 100MW);


                                       3
<PAGE>


         o  Whenever possible, entering into power sales contracts with electric
            utilities or other customers with significant credit strength, or
            alternatively pursuing methods to hedge costs and revenues to
            provide as much assurance as possible to the project's
            profitability; and

         o  Participating in electric power distribution and retail supply
            markets that grant concessions with long-term pricing arrangements.

         The AES Corporation also strives for operating excellence as a key
element of its strategy, which it believes is accomplished by minimizing
organizational layers and maximizing company-wide participation in
decision-making. The AES Corporation has attempted to create an operating
environment that results in safe, clean and reliable electricity generation.
Because of this emphasis, The AES Corporation (through its subsidiaries and
affiliates) prefers to operate all facilities which it develops or acquires.

         The AES Corporation attempts to finance each domestic and foreign plant
primarily under loan agreements and related documents which require the loans to
be repaid solely from the project's revenues and provide that the repayment of
the loans (and interest on the loans) is secured solely by the capital stock,
physical assets, contracts and cash flow of that plant subsidiary and affiliate.
The lenders under these financing structures cannot look to The AES Corporation
or its other projects for repayment.

         Principles and Practices

         A core part of The AES Corporation's corporate culture is a commitment
to "shared principles." These principles describe how The AES Corporation people
endeavor to behave, recognizing that they don't always live up to these
standards. The principles are:

         Integrity--The AES Corporation strives to act with integrity, or
         "wholeness." The AES Corporation seeks to honor its commitments. The
         goal is that the things The AES Corporation people say and do in all
         parts of The AES Corporation should fit together with truth and
         consistency.

         Fairness--The AES Corporation wants to treat fairly its people, its
         customers, its suppliers, its stockholders, governments and the
         communities in which it operates. Defining what is fair is often
         difficult, but The AES Corporation believes it is helpful to routinely
         question the relative fairness of alternative courses of action.

         Fun--The AES Corporation desires that people employed by The AES
         Corporation and those people with whom The AES Corporation interacts
         have fun in their work. The AES Corporation's goal has been to create
         and maintain an environment in which each person can flourish in the
         use of his or her gifts and skills and thereby enjoy the time spent at
         The AES Corporation.

         Social Responsibility--The AES Corporation believes that it has a
         responsibility to be involved in projects that provide social benefits,
         such as lower costs to customers, a high degree of safety and
         reliability, increased employment and a cleaner environment.

         The AES Corporation recognizes that most companies have standards and
ethics by which they operate and that business decisions are based, at least in
part, on these principles. The AES Corporation believes that an explicit
commitment to a particular set of standards is a useful way to encourage
ownership of those values among its people. While the people at The AES
Corporation acknowledge that they won't always live up to these standards, they
believe that being held accountable to these shared values will help them behave
more consistently with these principles.

         The AES Corporation makes an effort to support these principles in ways
that acknowledge a strong corporate commitment and encourage people to act
accordingly. For example, The AES Corporation conducts annual surveys, both
company-wide and at each location, designed to measure how well its people are
doing in supporting these principles--through interactions within The AES
Corporation and with people outside The AES Corporation. These surveys are
perhaps most useful in revealing failures, and helping to deal with those
failures. The AES Corporation's principles are relevant because they help
explain how The AES Corporation people approach The AES Corporation's business.
The AES


                                       4
<PAGE>


Corporation seeks to adhere to these principles, not as a means to achieve
economic success but because adherence is a worthwhile goal in and of itself.

         In order to create a fun working environment for its people and
implement its strategy of operational excellence, The AES Corporation has
adopted decentralized organizational principles and practices. For example, The
AES Corporation works to minimize the number of supervisory layers in its
organization. Most of The AES Corporation's plants operate without shift
supervisors. The project subsidiaries are responsible for all major
facility-specific business functions, including financing and capital
expenditures. The AES Corporation's criteria for hiring new people include a
person's willingness to accept responsibility and The AES Corporation's
principles as well as a person's experience and expertise. The AES Corporation
has generally organized itself into multi-skilled teams to develop projects,
rather than forming "staff" groups (such as a human resources department or an
engineering staff) to carry out specialized functions.

         Industry Overview

         The United States electric industry, including companies engaged in
providing generation, transmission, distribution, and ancillary services, has
undergone significant change over the last several years, leading to significant
deregulation and increased competition. The Federal Energy Regulatory Commission
requires the owners and operators of electric transmission facilities to make
those facilities available on a nondiscriminatory basis to all wholesale
generators, sellers and buyers of electricity. In addition, there have been an
increasing number of proposals throughout the United States to allow retail
customers to choose their electricity suppliers, with incumbent utilities
required to deliver that electricity over their transmission and distribution
systems. Numerous electric utilities nationwide are in the process of divesting
all or a portion of their electricity generating business or are expected to
commence this process in the foreseeable future, as legislative and regulatory
developments drive the industry to disaggregate.

         The restructuring of New York's vertically integrated utility industry
began in May 1996 as a result of an order of the Public Service Commission of
the State of New York requiring each investor owned utility to file a
restructuring plan. The Public Service Commission order called for wholesale
competition commencing in 1997, retail competition starting in 1998 and the
creation of an independent system operator ("ISO"). In the order, the Public
Service Commission expressed a preference for the divestiture of generation
assets and indicated that it would allow utilities to recover prudent and
verifiable stranded costs, which are costs that represent losses in the economic
value of existing generation-related utility assets. Restructuring agreements
for all of New York State's investor owned utilities have now been approved and
are being implemented. In the Upstate region of New York, customers other than
those in the service area of Rochester Gas & Electric Corporation were able to
choose their electricity providers by the end of 1999; in the service area of
Rochester Gas & Electric Corporation and in the Downstate region other than the
service area of the Long Island Power Authority, customers will be able to
choose their electricity providers by the end of 2001. Customers in the service
area of the Long Island Power Authority will be able to choose their electricity
providers by the end of 2003. Most investor owned utilities are divesting their
generating assets and becoming primarily distribution companies, resulting in
fragmentation of ownership of New York State's generation assets.

         Pursuant to the approved restructurings, transmission lines in New York
are controlled by the ISO and market prices for power are set through one or
more power exchanges. There are separate markets for installed capacity,
electric energy and ancillary services (including services which provide system
reliability) and prices are determined competitively. As most New York State
utilities have divested, or are expected to divest, some or all of their
generating assets, power suppliers need to purchase power from other generators.

         The transmission of electricity between regions is constrained by
physical limits on transmission capacity and limits on the amount of electricity
that may be imported into a power pool imposed by power pools to enhance
reliability. Therefore, the purchasers of generating assets in any given region
have a competitive advantage in that region over generators not in the region.
There is an existing natural market for the installed capacity and the electric
energy of our electricity generating stations in Western New York, which
includes the retail service territories of NYSEG, Niagara Mohawk Power
Corporation and Rochester Gas & Electric Corporation. The existing transmission
infrastructure also permits us to access neighboring markets. However, our
ability to sell electric energy into neighboring markets is limited by
constraints imposed by transmission capacity limitations and limits on imported
electricity imposed by power pools in those markets for reliability
considerations. Our ability to sell electric energy into neighboring markets may
also be limited because we are required to offer to sell our electric energy in
the New York market for the delivery of electric energy on the following day
during the term of a capacity purchase agreement that we have signed with NYSEG.
See "--Our Plan and Strategy--Installed Capacity Revenues."


                                       5
<PAGE>


         After the divestiture of its generating assets, NYSEG is still
regulated as a transmission and distribution utility and continued to supply all
required power to its service territory until August 1999, when full retail
competition began. NYSEG is still the power supplier for those customers who did
not actively choose a different power supplier. To fulfill its commitments to
deliver this power, NYSEG is required to obtain installed capacity commitments
to satisfy the projected demand of its customers and to purchase electric energy
in the open market or enter into bilateral power purchase agreements. The
capacity purchase agreement that we have signed with NYSEG addresses NYSEG's
need to obtain commitments of installed capacity through April 2001.

         New York Power Market

         The new ISO system commenced operations in November 1999 and consists
of three new entities, the ISO, the New York State Reliability Council and New
York Power Exchange. The ISO is a non-profit New York corporation under the
Federal Energy Regulatory Commission's jurisdiction. It is governed by a board
of directors with 10 members and three committees, the management committee, the
operating committee, and the business issues committee, which are composed of
representatives from all market participants, including buyers of power, sellers
of power, consumer groups and transmission owners. The New York State
Reliability Council has the primary responsibility to preserve the reliability
of electricity service on the bulk power system within New York State and sets
the reliability standards to be used by the ISO. The New York Power Exchange is
one of many possible power exchanges in New York State which will be formed to
facilitate competition in the power markets, and to operate the actual markets
for installed capacity, energy and ancillary services which will be maintained
for the offer and sale of those commodities for delivery on the following day
and on an immediate basis. The ISO system only recently began operations. The
rules may change based on recommendations by the committees to the board of
directors.

         Prior to commencement of operations of the ISO system, the New York
power pool operated a centrally dispatched pool to minimize member production
costs and to maintain statewide reliability. It also coordinated the operation
of the bulk power transmission facilities in the state. The New York power pool
is an association of the investor owned utilities in the state, the New York
Power Authority and the Long Island Power Authority.

         The New York power pool member systems serve over 99% of New York
State's electric power requirements. In addition, over 8,000MW of capacity is
owned by non-utility generators, who sell the bulk of their output to the
investor-owned utilities under long-term contracts. The New York power market is
interconnected with New England power pool to the northeast, Hydro Quebec and
Ontario Hydro to the north, and Pennsylvania-New Jersey-Maryland power pool to
the south.

         Transmission System Market. Transmission access is available to all
market participants on a comparable and non-discriminatory basis. The party
transmitting electric energy pays the ISO a transmission service charge to cover
the revenue requirements of the transmission owner. In addition to the
transmission service charges, electric energy under a bilateral contract is
subject to a congestion charge. The congestion charge reflects the differences
between the marginal power price at the source and destination on the
transmission system. Parties can hedge their exposure to congestion charges
through transmission congestion contracts which are auctioned biannually.

         New York Power Pool Wholesale Market. Electric energy generators sell
electric energy, installed capacity and ancillary services at the wholesale
level to regulated distribution utilities, municipalities and energy supply
companies. Electric energy generators may also sell electric energy, installed
capacity and ancillary services in the centralized wholesale market coordinated
by the ISO. Competition in wholesale and retail markets has led to unbundling of
and distinct markets for electric energy, installed capacity and ancillary
services.

         Electric Energy Markets. Any generator in the state can sell its output
of electric energy to any wholesale customer statewide including utilities,
municipalities, and energy supply companies. Generators can sell electric energy
under bilateral contracts, with pricing and other provisions determined by
two-party negotiation, or they can bid into either or both of two centralized
markets for electric energy, a market for delivery on the following day or a
market for delivery on an immediate basis, which is intended primarily to ensure
that actual loads and resources match up. The system pricing is based upon
market clearing price, which is the price at which sufficient electric energy is
supplied to satisfy all demand for which bids have been submitted. If a
generator's bid is equal to or less than the market clearing price, the
generator will be paid the market clearing price, rather than its bid price, at
the point it supplies electric energy to the system and the purchaser will pay
the market clearing price at the point it receives electric energy from the
system. If a generator's bid exceeds the market clearing price, the generator
will not be dispatched.


                                       6
<PAGE>


         Installed Capacity Market. A market in which electricity generators can
sell commitments of their installed generating capacity has been established to
ensure there is enough generation capacity to meet retail demand and ancillary
service requirements. Any load serving entity, i.e., an entity selling electric
energy to consumers of electric energy, including regulated distribution
utilities, municipalities and energy supply companies, is required to procure
capacity commitments sufficient to meet its capacity requirements for the next
year based on its forecasted annual requirements at times of maximum usage plus
a reserve requirement. Initially, each load serving entity is required to
purchase installed capacity commitments equal to 118% of its forecasted annual
maximum usage (which translates into a 22% control area reserve margin). The
load serving entity can secure these capacity commitments through a bilateral
contract or through installed capacity auctions. Any capacity commitment which
is not procured locally needs to satisfy the requirement that, as an import, it
does not violate transmission constraints. Any load serving entity that fails to
satisfy its installed capacity requirements is subject to a deficiency payment
of $52.50 per KW-year in the first year escalating to $62.50 per KW-year in the
third year, which is well above forecasted capacity prices. The deficiency
payments are higher for New York City and Long Island.

         Suppliers of installed capacity are not required to supply the
associated electric energy to the load serving entity with whom they have a
contract to provide installed capacity. However, if the load serving entity does
not purchase electric energy from its installed capacity supplier, the installed
capacity supplier is required to submit an offer to sell its electric energy
into the electric energy market for delivery on the following day. If the
installed capacity supplier's offer in the electric energy market for delivery
on the following day is not accepted, the installed capacity supplier, for the
next day, will be free either to offer to sell its electric energy in the market
for delivery on an immediate basis or to sell electric energy to any customer,
including out-of-state customers.

         Ancillary Services Market. The ISO will procure various ancillary
services required for reliability from generators as needed. Services to be
procured on a market basis include operating reserves and regulation and
frequency support. Generators will be compensated for other services, including
voltage support and black start capability, on a cost basis.

         Generation. The existing generation mix in New York is fairly diverse.
As of January 1, 1999, nuclear and coal facilities made up only 28% of the
installed capacity. Non-utility generators ("NUGs"), which are predominantly
gas-fired, formed another 23% of installed capacity. The remaining 49% of
installed capacity, comprised of oil, gas and seasonal hydro plants, is
considered to be economically viable only at times of peak demand. Even though
the nuclear and coal facilities comprise 28% of the installed capacity, they
produced 41% of the electric energy in 1998.

                      Net Capacity (Summer) by Fuel Type in

                                 New York (1998)

            Oil/Dual fuel........................................ 33%
            NUGs................................................. 23%
            Coal................................................. 14%
            Nuclear.............................................. 14%
            Conventional Hydro................................... 12%
            Pumped Storage Hydro.................................  3%
            Natural Gas..........................................  1%
                                                                 ----
                                                                 100%

                         Net Generation by Fuel Type in

                                 New York (1998)

            NUGs................................................. 25%
            Nuclear.............................................. 21%
            Coal................................................. 20%
            Conventional Hydro................................... 17%
            Natural Gas.......................................... 10%
            Oil..................................................  6%


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<PAGE>


            Pumped Storage Hydro.................................  1%
                                                                 ----
                                                                 100%

            Source: New York Power Pool, 1999 Load and Capacity Data.

         Regions. New York State has regional transmission constraints which
divide the state's power market into distinct regions. The most significant
transmission constraints impede the transmission of electricity going west to
east. As a result, the most significant regional differences in the power market
are between the western and eastern regions. The eastern region includes the
service areas of the Long Island Power Authority, Key Span Energy Corporation,
Consolidated Edison Company of New York, Inc., Orange & Rockland Utilities, Inc.
and Central Hudson Gas & Electric Corporation. The western region includes
service areas of Niagara Mohawk Power Corporation, Rochester Gas & Electric
Corporation, the New York Power Authority and most of NYSEG.

         The western region is dominated by low cost nuclear and coal and hydro
facilities which, together with non-utility generators that must be permitted to
run under their power purchase agreements with local utilities, form 83% of
installed capacity. The eastern region has a predominance of facilities which
are economically viable only at periods of peak demand, which form 80% of its
installed capacity. Even though the western region has only 40% of the New York
power market's generation capacity, power normally flows from the west into the
east. The flow of power from the lower priced western region to the higher
priced eastern region is limited to approximately 5,000MW by transmission limits
and reliability considerations. When this limit is reached, higher cost units in
the New York City area are directed to run even when lower cost units in the
western region are available.

         Demand. In 1998, the New York power pool summer peak was 28,160MW and
electric energy demand totaled 151,420GWh. The statewide summer peak demand grew
by an average of 2.2% per year from 1992 to 1998, while electric energy demand
grew by an average of 0.9% annually during that same period. Current New York
power pool forecasts call for a continued capacity surplus until 2003, except
for 2001 when an external purchase is required. After 2003, new capacity will be
required in order to maintain system reserve margin requirements. PG&E
Generating and Sithe Energies, Inc. have recently announced new projects that,
if completed, will extend the forecasted capacity surplus beyond 2008.

         Interconnection. Western and central New York are relatively
unattractive markets for the transmission of imported power due to the low
generation costs of existing facilities and low on-peak electric energy prices
relative to the area's adjacent markets, the New England power pool, the
Pennsylvania-New Jersey-Maryland power pool and eastern New York. On the export
side, the New England power pool and the Pennsylvania-New Jersey-Maryland power
pool forecast higher demand growth for their markets. Furthermore, the existing
transmission infrastructure permits us to access these neighboring markets,
subject to constraints imposed by capacity limitations and reliability
considerations and subject to our obligation to offer to sell our electric
energy in the New York market for the delivery of electric energy on the
following day during the term of the capacity purchase agreement with NYSEG in
accordance with the rules of the New York ISO.

         The Pennsylvania-New Jersey-Maryland power pool is a market
characterized by high price volatility where peak hour pricing is set by
inefficient diesel-fired facilities. The Pennsylvania-New Jersey-Maryland power
pool forecasts summer peak demand to grow 1.6% per year over the next ten years
and projects that a capacity shortage will occur by 2000. The New England power
pool, where energy prices are among the highest in the U.S., relies heavily on
relatively inefficient oil and gas-fueled steam power plants. The New England
power pool is currently experiencing capacity shortfalls primarily due to
nuclear outages and retirements. New capacity is required in the New England
power pool to meet increasing demand, which may increase installed capacity
prices in the near term. The New York power market has transfer capacity to the
New England power market of 1,675MW through two 345KV interconnections and
transfer capacity to the Pennsylvania-New Jersey-Maryland power pool of 725MW.

         Our Plan and Strategy

         Introduction

         Consistent with the corporate philosophy of The AES Corporation, our
strategy for the long-term profitable operation of our electricity generating
stations is to continue to operate the stations in a low cost, environmentally
responsible way. We expect to reduce these stations' current operating costs by
implementing the decentralized operating philosophy of The AES Corporation.


                                       8
<PAGE>


         In general, we plan to sell the electric energy generated by our
electricity generating stations directly into the spot market. We entered into a
two-year agreement for energy marketing services with Merchant Energy Group of
the Americas, Inc. ("MEGA"), an Annapolis, Maryland-based subsidiary of Gener
S.A., a Chilean independent power producer listed on the New York Stock
Exchange. MEGA will be responsible for marketing our electric energy, installed
capacity and ancillary services in the deregulated New York power market. We
entered into the capacity purchase agreement with NYSEG pursuant to which we
agreed to make the installed capacity of our electricity generating stations
available to NYSEG for $68 per MW-day through April 2001. The capacity purchase
agreement permits us to sell our electric energy and ancillary services to NYSEG
or any other purchaser. During the term of the capacity purchase agreement, the
rules of the New York ISO system will require us to offer to sell our electric
energy in the New York market for the delivery of electric energy on the
following day. It is possible that we will enter into additional bilateral sales
contracts for installed capacity or electric energy from our electricity
generating stations in the future. We expect that strategic opportunities to
enter into long-term contracts will occur over the next few years as New York
electric utilities complete their divestiture programs and any transitional
capacity and energy sales contracts they may sign at the time of divestiture
expire, and full retail competition for electric energy develops.

         We believe that we have a number of advantages that will help us
implement this strategy. First, our ultimate parent, The AES Corporation, has
several plants in the northeast region that are currently operating, under
construction, or in advanced stages of development. These assets give The AES
Corporation familiarity with the operating environment in the region and offer
possibilities for achieving economies of scale, particularly with respect to
coal purchases. Second, our electricity generating stations utilize coal as
their primary fuel. The inflation adjusted or real price of coal has declined
historically and we expect that trend to continue at least until 2010. This may
allow us to offer fixed price electric energy contracts that are responsive to
our customers' desire to insulate themselves from potential volatility in the
electric energy spot market. However, our assumption that the real price of coal
will decline until at least 2010 may not be correct. An increase in the real
price of coal will negatively affect our operating results. We may be unable to
meet our operating expenses if we enter into fixed price electric energy
contracts and the price of coal rises to levels higher than those we projected.
We may attempt to hedge these contracts with matching coal contracts. Third, The
AES Corporation has acquired older plants throughout the world and has been able
to operate them efficiently, reliably and in a cost effective manner. The AES
Corporation also has made capital investments in older plants to extend the
operational lives of the plants.

         Electricity Marketing Plan

         Competitive markets for electric energy, installed capacity and various
ancillary services in the New York power market will allow us to enter into both
bilateral and bid-based energy transactions. Additionally, New York is pursuing
a statewide retail access schedule that is among the most aggressive in the
country. New York power markets currently operate near capacity and the New York
power pool projects a capacity deficit for New York beginning in 2003. Central
and western New York is a source of low-cost generation, giving us potential to
export electric energy to neighboring power pools with higher costs and prices.
These opportunities are subject to constraints imposed by transmission capacity
limitations and reliability considerations and subject to our obligation to
offer to sell our electric energy in the New York market for delivery of
electric energy on the following day during the term of the capacity purchase
agreement with NYSEG in accordance with the rules of the New York ISO system.
The New York market is interconnected with the higher cost neighboring regions,
the New England power pool and the Pennsylvania-New Jersey-Maryland power pool.
The projected low and stable production costs of our electric energy should
provide us with an attractive competitive position in a dynamic and increasingly
volatile environment.

         Under our agreement with MEGA, we gave MEGA exclusive rights to market
our electricity generating stations' available electric energy, installed
capacity and ancillary services through direct pool transactions with the New
York power pool, indirect pool transactions as a satellite New York power pool
member through NYSEG, bilateral transactions and other physical and financial
transactions. MEGA has full authority to manage marketing, trading and hedging
activities with respect to the available electric energy, installed capacity and
ancillary services of our electricity generating stations, except to the extent
that MEGA's authority is limited by risk policies and procedures specified in
the agreement. The risk policies and procedures stipulate the commodities MEGA
is authorized to trade, the volume limits of MEGA's authority, limits on the
length of contracts MEGA is authorized to enter into and stop-loss and aggregate
exposure limits. We may change the risk policies and procedures at any time. The
risk policies and procedures are administered by a committee made up of two
representatives of each of us and MEGA.

         The agreement with MEGA provides that MEGA will remit to us the sum of
all revenues received minus MEGA's costs in connection with sales of our
electricity generating stations' available electric energy, installed capacity
and


                                       9
<PAGE>


ancillary services, provided these costs are incurred in accordance with
practices generally followed by the electric utility industry. We will pay MEGA
$88,500 per month in advance for services provided under the agreement. In
addition, we will compensate MEGA for any transaction extending one year beyond
the term of the agreement as negotiated on a case by case basis up to a maximum
of 5% of the gross margin of the transaction. MEGA's minimum compensation for
all of the transactions extending one year beyond the term of the agreement in
the aggregate is $0.10/MWh, provided that the minimum compensation cannot exceed
the lesser of (a) $2,500,000 or (b) $125,000 multiplied by the total number of
months the agreement remains in effect, provided the agreement remains in effect
for at least 12 months. MEGA also is obligated to provide space and training for
two of our employees in MEGA's office. The financial obligations of MEGA under
the agreement are guaranteed by its parent company, Gener S.A.

         The initial term of the agreement with MEGA ends on March 31, 2001.
Beginning August 1, 1999, we may terminate the agreement upon 90 days written
notice to MEGA and, beginning August 1, 2000, MEGA may terminate the agreement
upon 120 days written notice to us. After the initial term, the agreement will
be extended automatically each year until terminated in accordance with these
notice requirements.

         We decided to arrange for marketing of electricity in the near term
through our agreement with MEGA rather than to create our own marketing
infrastructure. As our personnel gain expertise in this process or as we enter
into longer term bilateral markets for electric energy, this function may be
managed increasingly by our personnel. The development of our business and the
business of other affiliates of The AES Corporation will determine whether or
not we will eventually market electricity without the assistance of MEGA or
other third parties. We will develop an independent marketing infrastructure,
either alone or with other affiliates of The AES Corporation that may in the
future engage in market sales of wholesale electricity, if the level of activity
justifies the necessary investment and we are unable to obtain satisfactory
marketing services from third parties at a reasonable price.

         Energy Revenues. We plan to sell directly into the spot market and will
focus on operating our electricity generating stations at high volume on a
cost-effective basis. It is possible that on occasion we will enter into
bilateral sales contracts for our electricity generating stations' electric
energy in the future.

         The demand for, and the price of, electricity is usually highest during
the summer and winter peak seasons. We expect that our electricity generating
stations will be almost always dispatched because they are low-cost, efficient
units.

         Our electricity generating stations' revenues may increase over time if
we are able to gain access to export markets. Historically, NYSEG has
successfully exported to the Pennsylvania-New Jersey-Maryland power pool at a
premium over western New York prices. During the term of the capacity purchase
agreement with NYSEG, the rules of the New York ISO system will require us to
offer to sell our electric energy in the New York market for the delivery of
electric energy on the following day. We will be permitted to sell electric
energy into other pools only when the electricity is not needed in the New York
power pool.

         Installed Capacity Revenues. For reliability reasons, the New York ISO
system will require that electricity generators that sell installed capacity
into New York must make their electric energy available in the event of a system
emergency. This prevents generators from entering into firm contracts to sell
electric energy into one market and installed capacity into another. Thus, we
must make our choice of market for installed capacity sales in conjunction with
expected electric energy sales.

         AES NY, L.L.C. and New York State Electric & Gas Corporation entered
into a New York Transition Agreement, dated as of August 3, 1998, to ease the
transition of New York State Electric & Gas Corporation's native load customers'
installed capacity requirements. Under this agreement, New York State Electric &
Gas Corporation agreed to purchase, and AES NY, L.L.C. agreed to sell, installed
capacity in the amount of 1,424MW (which is the aggregate capacity of all of the
generating assets included in the assets acquired from NYSEG) for the term of
the agreement. The parties performance under the agreement commenced on May 14,
1999 and will terminate on April 30, 2001, or earlier in accordance with the
agreement. AES NY, L.L.C. assigned this agreement to us insofar as it relates to
our electricity generating stations.

         New York State Electric & Gas Corporation is required to compensate us
for installed capacity at the price of $68/MW-Day. Whenever installed capacity
provided to New York State Electric & Gas Corporation by us is less than the
amount of installed capacity that we are required to supply, we will pay New
York State Electric & Gas Corporation monthly for costs incurred by New York
State Electric & Gas Corporation due to this failure, in an amount equal to the
sum of:


                                       10
<PAGE>


               (1) charges imposed on New York State Electric & Gas Corporation
         by the independent system operator, to the extent they exceed charges
         that would have been due had we fulfilled our obligations, including
         penalties and fines;

               (2) New York State Electric & Gas Corporation's replacement
         capacity cost (to the extent not included in (1)), if we fail to
         provide replacement capacity; and

               (3) all transaction costs not included in (1) or (2) that are
         associated with this failure.

         This agreement does not address the purchase or sale of electric energy
or ancillary services and does not obligate either New York State Electric & Gas
Corporation or us to purchase or sell and deliver energy to the other party.
This agreement is subject to regulatory acceptance or approval without material
modification or condition. The parties have agreed to indemnify one another for
claims arising out of or connected with this agreement.

         Fuel Supply Strategy

         We believe we have significant competitive advantages in relation to
our coal supply that will help us maintain low operating costs relative to our
competitors. Our electricity generating stations are located in close proximity
to important coal producers. In addition, both the Somerset Generating Station
and the Cayuga Generating Station are equipped with flue gas desulfurization
systems which allow the plant to burn less expensive medium- and high-sulfur
coal while staying within SO2 emission regulation requirements. We and The AES
Corporation's facilities in the adjacent New England power pool and
Pennsylvania-New Jersey-Maryland power pool may have opportunities to pool our
buying power when negotiating prices and terms with coal suppliers. We are
projecting total coal usage of approximately 3.5 million tons per year.

         Coal mines in the Pittsburgh Seam coal formation near our electricity
generating stations include some of the lowest cost coal supply sources
producing at volume. Although more expensive low-sulfur coals are available for
units without flue gas desulfurization systems, the high sulfur content of the
coals from the Pittsburgh Seam have historically made coal-fired generating
stations equipped with flue gas desulfurization systems the primary market for
Pittsburgh Seam producers. Since both the Somerset Generating Station and the
Cayuga Generating Station have installed flue gas desulfurization systems and
are capable of burning higher sulfur coals, we expect to maintain a fuel cost
advantage over competitors without flue gas desulfurization systems.

         Approximately 100% of the Somerset Generating Station's and
approximately 70% of the Cayuga Generating Station's coal requirements initially
will be supplied under a contract with Consolidation Coal Company ("Consol"),
under which Consol will provide coal at least through 2002. The agreement
terminates on December 31, 2003 unless extended by the parties.

         Pursuant to the terms of the agreement, the total amount of coal to be
purchased for the Somerset Generating Station is divided into three lots: Lot A,
Lot B and Lot C. In any given calendar year, each of the three lots contains the
exact same tonnage of coal, with each lot representing one-third of the coal
purchased from the coal sellers for use at the Somerset Generating Station in a
given year. Pursuant to the terms of a letter agreement, dated December 8, 1997,
between NYSEG and Consol, the price for each of Lots A, B and C was fixed at
$0.868 per million Btu (which we estimate to be equivalent to $22.57 per ton) in
the year 2000, in each case subject to adjustment for variations in "as
received" heating quality and other adjustments. Thereafter, each lot of coal
becomes eligible for price renegotiation every third year in staggered order.

         During price renegotiations in any year following a year in which we
and the coal sellers were unable to agree on revised pricing terms with respect
to a given lot, we and the coal sellers may negotiate not only with respect to
the lot then eligible for renegotiation but also with respect to the lot lost in
the previous year's renegotiation. If we and the coal sellers are unable to
agree on revised terms with respect to any given lot for two successive
renegotiations, then our obligations and the obligations of the coal sellers
with respect to that lot terminates. We may then replace this lot's tonnage by
any means and from any source we deem appropriate throughout the remaining term
of the agreement.

         In any year in which the coal sellers supply only one lot (that is,
one-third of the coal purchased for the Somerset Generating Station) and this
lot is then up for renegotiation, either we or the coal sellers may terminate
the agreement in our or its sole discretion. Any such termination would become
effective on the next specified termination date for this lot.


                                       11
<PAGE>


         During 2000, Consol is committed to sell and we are committed to
purchase all three lots of coal and either party may request renegotiation of
the price of one lot of coal for the following year. If either party requested
renegotiation during 2000 but the parties failed to reach agreement, then the
parties would have commitments with respect to only two lots in 2001. If the
same thing happened in 2001, the parties would have commitments with respect to
only one lot in 2002 and either party could terminate the contract in its sole
discretion at the end of 2002.

         The agreement was assigned to us by AES NY, L.L.C. The coal sellers
have consented to the assignment but have refused to release NYSEG from its
obligations under the agreement. We will indemnify NYSEG if NYSEG incurs any
liability as a result of our performance under the agreement.

         We and Somerset Railroad entered into a Coal Hauling Agreement for the
purpose of Somerset Railroad hauling coal and other materials required by the
Somerset Generating Station. We are obligated to pay Somerset Railroad the
amounts that will be sufficient, when added to funds available to Somerset
Railroad from other sources, to enable Somerset Railroad to pay, when due, all
of its operating and other expenses, including interest on and principal of
outstanding indebtedness. Somerset Railroad currently has a 364-day term loan of
up to $26 million principal amount from an affiliate of CIBC World Markets. This
term loan bears interest at a rate per annum, as selected by us, equal to either
LIBOR plus 1.35% or a base rate plus 1.25%. The term loan is secured by a
security interest in substantially all of the assets of Somerset Railroad, a
pledge by AES NY3, L.L.C. of all of the shares of stock of Somerset Railroad and
an assignment of the rights of Somerset Railroad under the Coal Hauling
Agreement.

         The Greenidge Generating Station and the Westover Generating Station
have or are in the process of negotiating short-term, fixed-price coal supply
agreements expiring at the end of 2000 and thereafter we expect that the
Greenidge Generating Station and the Westover Generating Station will rely on
spot market purchases of medium-sulfur coal. It is possible that our electric
energy revenues may not keep pace with our coal costs if market prices for
purchases of fuel escalate more rapidly than market prices for sales of electric
energy and energy-related products.

         Each of our electricity generating stations typically receives coal
through conventional rail delivery. The Somerset Generating Station is served by
Somerset Railroad, a single track railroad owned by AES NY3, L.L.C., a
wholly-owned subsidiary of The AES Corporation that delivers coal from a rail
junction located in Lockport, New York. The rail cars of Somerset Railroad are
used to transport coal to the Cayuga Generating Station over tracks owned by
another railroad. In addition, the Cayuga Generating Station can receive coal
delivery via truck.

         Operations and Maintenance Plan

         Consistent with the philosophy of The AES Corporation regarding other
affiliates and subsidiaries, we are a decentralized organization with few
organizational layers. To the extent permitted by the agreements relating to the
lease of the Somerset Generating Station and the Cayuga Generating Station, we
entered into an operations and maintenance contract for each electricity
generating station with a different wholly owned subsidiary. The purpose of this
arrangement is to create an organizational structure that reflects the
decentralized philosophy of The AES Corporation. Decision making will, as much
as possible, be vested at the individual plant level, as will accountability for
meeting financial, plant performance and other objectives. In the experience of
The AES Corporation, this approach increases the motivation of employees to
maximize revenues, to minimize overall facility production costs and to manage
risks effectively.

         We intend to maintain our electricity generating stations in a manner
that will extend their current service lives. Operations and maintenance of the
electricity generating stations as well as fuel procurement and environmental
compliance will be managed internally.

         In general, the specific market for each unit's output will drive our
view on operations and maintenance expense at the individual units. Subject to
the requirements of the agreements relating to the lease of the Somerset
Generating Station and the Cayuga Generating Station, plant managers and team
leaders at each plant will respond to market signals in determining appropriate
levels of plant spending in order to maintain and enhance plant profitability.

         At the Somerset Generating Station, the installation of a $31 million
selective catalytic reduction system, with Babcock & Wilcox as the turnkey
contractor and Hitachi as the supplier of the catalyst, was completed in June
1999. See "--The Somerset Electricity Generating Station--Environmental." In
addition, we completed a turbine overhaul at the Somerset Generating Station in
June 1999.


                                       12
<PAGE>


         At the Cayuga Generating Station, we are currently a planning major
maintenance outages for Unit 1 in 2001 and Unit 2 in 2002. As at the Somerset
Generating Station, the efforts are designed to protect and improve the
station's reliability and efficiency. We may also install a selective catalytic
reduction system at the Cayuga Generating Station to comply with the likely more
stringent Phase III NOX regulations, which will take effect in May 2003. We will
also consider lower cost alternative compliance strategies such as the addition
of a selective non-catalytic reduction system. See "--Regulation--Environmental
Regulatory Matters."

         At the Westover Generating Station and the Greenidge Generating
Station, we believe that our planned maintenance budgets are sufficient to
extend the current availability performance of the units. We may repower or
pursue other development options at these electricity generating stations.

         Environmental Compliance

         Our electricity generating stations are designed and operated in
substantial compliance with currently applicable environmental laws and
regulations of the United States Environmental Protection Agency and the New
York State Department of Environmental Protection. All of the applicable
environmental permits for our electricity generating stations have been
transferred to us or to affiliates of ours that own and operate the electricity
generating stations. See "--Regulation--Environmental Regulatory Matters."

         The Electricity Generating Stations

         We believe that our two principal coal-fired electricity generating
stations, the Somerset Generating Station and the Cayuga Generating Station, are
operated currently at or near operating costs at which they can be run
economically even at times of minimum demand for electric energy, and we expect
them to be fully dispatched when available in the deregulated and competitive
New York power market. As a means of further enhancing the competitive position
of our electricity generating stations in the New York power market, we expect
to use expertise gained by The AES Corporation as a major operator of coal-fired
facilities on a worldwide basis. We also intend to make appropriate investments
of capital to maintain our electricity generating stations and to extend their
service lives. The Somerset, Cayuga, Westover and Greenidge Generating Stations
have an aggregate net generating capacity of 1,268MW.

         The Somerset Generating Station

         Overview

         The Somerset Generating Station is the largest and newest of our
electricity generating stations and is located northeast of Niagara Falls,
alongside the southern shore of Lake Ontario near Barker, New York. There is a
single operating unit at the Somerset Generating Station, which began generating
electricity in 1984. The maximum net generating capacity of the Somerset
Generating Station is 675MW. The Somerset Generating Station is comprised of a
steam turbine generator manufactured by General Electric and is supplied steam
from a Babcock & Wilcox coal-fired steam generator.

         The Somerset Generating Station currently operates at operating costs
at which it can be run economically even at times of minimum demand for electric
energy. The Somerset Generating Station also is capable of burning low cost
medium- and high-sulfur coal as a result of being equipped with a flue gas
desulfurization system. When the Somerset Generating Station is not being
dispatched at maximum load, its periodic load can be varied to both meet system
load demand and provide transmission system support and the plant can provide
both operating reserves that are available immediately or on ten minutes notice.
In 1999, the Somerset Generating Station generated approximately 51% of the
total annual production of our electricity generating stations.

         The turbine generator at the Somerset Generating Station developed an
unusual vibration following a maintenance outage conducted by NYSEG in September
1998, although the unit was operating at full load at the time the Somerset
Generating Station was acquired from NYSEG. We performed maintenance during the
previously scheduled major turbine overhaul in May and June 1999.


                                       13
<PAGE>


         We and NYSEG entered into an agreement pursuant to which NYSEG agreed
to bear the costs of repair and to reimburse us for a defined measure of lost
revenues resulting from any lost production caused by the vibration condition
resulting from anything other than:

               (a) repair and maintenance to the turbine generator consistent
         with a ten-year wear and tear factor (from baseline data contained in a
         mutually acceptable report), or

               (b) normal "wear and tear" of the turbine generator.

         We have made demand on NYSEG, by letter dated October 5, 1999, for
payment of approximately $852,000 in costs incurred by us to satisfactorily
address the vibration condition and which costs are not attributable to either
factor enumerated in the preceding sentence. NYSEG has asserted, by letter dated
October 13, 1999, that it is not responsible for such costs because:

               (a) NYSEG maintains that the actions taken by us that generated
         such costs were not necessary to address the vibration condition,

               (b) NYSEG maintains the activities that generated these costs
         were either (1) part of the repair and maintenance to the turbine
         generator consistent with a ten-year wear and tear factor, or (2)
         repair and maintenance necessary to address normal wear and tear,

               (c) NYSEG maintains that the turbine outage extension component
         of the costs incurred by us resulted from activities undertaken by us
         without NYSEG's consent and we are therefore outside the scope of the
         above-referenced agreement, and

               (d) we, in NYSEG's view, breached the provisions of the
         above-referenced agreement and therefore we should not be entitled to
         assert rights under such agreement.

         We are currently considering our options for the recovery of these
costs. One of our options is to pursue the dispute resolution procedure
incorporated into this agreement from the Asset Purchase Agreement, which first
provides for consultation by senior people of The AES Corporation and NYSEG and,
if that fails, for binding arbitration.

         Environmental

         The Somerset Generating Station was the first unit in New York to be
fitted with flue gas desulfurization technology. The Somerset Generating
Station's flue gas desulfurization system presently operates at less than 85%
SO2 reduction. The plant has the potential to consume significantly fewer SO2
allowances with minimal additional costs by operating the flue gas
desulfurization system at greater than 90% reduction.

         The Somerset Generating Station's selective catalytic reduction system
began operation in June 1999. The selective catalytic reduction system will
generate excess NOX allowances that we believe we will be able to sell or to
transfer to our other electricity generating stations to allow all of our
electricity generating stations to operate at planned capacity factors under
more restrictive regulations governing NOX emissions in the May-September ozone
season that took effect in May 1999.

         The selective catalytic reduction system will work in conjunction with
existing NOX control equipment and procedures at the Somerset Generating
Station. Originally, the plant was designed with low NOX burners. In response to
1995 requirements for ozone season compliance, various methods to improve the
combustion NOX control capability beyond the original burner design were
implemented. We anticipate that the combination of these NOX mitigation measures
will result in a NOX rate of 0.04 lbs. per MMBtu during the ozone season, which
is significantly below the current NOX permit level. In addition, this low
emission rate will play an important role in bringing the overall average NOX
emissions rate from the former NYSEG plants below the rate required under the
year round system-wide NOX averaging plan approved by the New York Department of
Environmental Conservation.

         The Somerset Generating Station's additional environmental features
include electrostatic precipitators, a completely lined coal handling facility
and a continuous emissions monitoring system.


                                       14
<PAGE>


         Transmission

         The Somerset Generating Station is interconnected to the New York power
pool bulk transmission system via two 345KV transmission lines.

         The Cayuga Generating Station

         Overview

         The Cayuga Generating Station is located alongside the east shore of
Cayuga Lake, near the town of Lansing, New York. There are two operating units
at the Cayuga Generating Station, Unit 1 and Unit 2, which began generating
electricity in 1955 and 1958, respectively. The maximum net generating capacity
of both units is 306MW in aggregate.

         Cayuga Unit 1 currently has a net generating capacity of 150MW. It is
comprised of a steam turbine generator manufactured by Westinghouse Electric. It
is supplied steam from a Combustion Engineering coal-fired steam generator with
reheat steam capability. Unit 2 currently has a net generating capacity of
156MW. It utilizes a steam turbine generator manufactured by General Electric
and is supplied steam from the same type of boiler as Unit 1.

         The Cayuga Generating Station historically has been operated at
operating costs at which it can be run economically even at times of minimum
demand for electric energy. The Cayuga Generating Station also is capable of
burning low cost medium- and high-sulfur coal as a result of being equipped with
a flue gas desulfurization system. When the Cayuga Generating Station is not
being dispatched at maximum load, its periodic load can be varied to meet both
system load demand and provide transmission system support, and the plant can
provide both operating reserves that are available immediately or on ten minutes
notice. The plant is also equipped with Automatic Generation Controls enabling
it to provide regulation, frequency support, and, due to the existence of backup
diesel generators, the capability to start operating from a shutdown condition
without external assistance (known as "black start" capability). In 1999, the
Cayuga Generating Station generated approximately 28% of the total annual
production of our electricity generating stations.

         Environmental

         The Cayuga Generating Station benefited from NYSEG's selection to
participate in the United States Department of Energy ("DOE") Clean Coal
Technology Round IV demonstration program, which was designed to develop
advanced, more efficient and environmentally-responsive coal combustion
technologies. As a result of this program, the Cayuga Generating Station was
retrofitted in 1995 with an advanced flue gas desulfurization system. For NOX
reduction, a Low NOX Concentric Firing System was installed to achieve up to a
45% reduction in NOX emissions.

         In addition to the Low NOX Concentric Firing System project, a 2MW
selective catalytic reduction reactor and a test scale ABB Air Preheater heat
pipe were installed at the Cayuga Generating Station on Unit 2 in 1994. During
the test period, the Cayuga Generating Station burned medium- and high-sulfur
coal with sulfur levels ranging from 1.5% to 2.6%, with a reduction of SO2
emissions by 97-98%. The flue gas desulfurization system also produces
wallboard-quality gypsum.

         We are continuing water treatment programs instituted by NYSEG to
protect lakes and groundwater supplies nearby the Cayuga Generating Station.
NYSEG also installed or upgraded facilities to collect and treat water from
yard, roof and in-plant drains, maintenance cleaning washes and coal-pile
runoff.

         Exceedences of state groundwater standards at the Cayuga Generating
Station were reported in the vicinity of the on-site coal pile, coal pile runoff
pond and the ash disposal site. In 1997, a new coal pile liner was installed.
Based on data provided by NYSEG, we have budgeted monitoring and investigation
costs of approximately $270,000 for the coal pile runoff pond area and
approximately $163,000 for the ash disposal area.

         NYSEG has been actively selling fly ash from the Cayuga Generating
Station since 1983. Its new coal pulverization system provides flexibility in
coal fineness adjustment for firing under low NOX conditions. Coal pulverized
and burned in this manner results in fly ash that can be sold to the New York
Department of Transportation.


                                       15
<PAGE>


         Transmission

         The Cayuga Generating Station is centrally located in the New York
State electric system, connected through three 115KV lines and three 34.5KV
lines to the New York bulk transmission system. Additionally, the Cayuga
Generating Station is located in the only area in NYSEG's service territory that
NYSEG has identified as requiring voltage support. We entered into an agreement
with NYSEG which permits NYSEG to require the dispatch of the Cayuga Generating
Station under some circumstances for up to seven years.

         Westover Generating Station

         The Westover Generating Station is located alongside the Susquehanna
River near Johnson City, New York, and began generating electricity in the early
1900's. Units 1 through 6 have been retired and physically removed. The Westover
Generating Station presently consists of two pulverized coal units, Unit 7 and
Unit 8, with a combined maximum net generating capacity of 126MW. In 1999, the
Westover Generating Station generated approximately 9% of the total production
of our electricity generating stations.

         The Westover Generating Station is capable of providing both operating
reserves that are available immediately or on ten minutes notice. The station is
equipped with Automatic Generation Controls, which connect it to the New York
independent system operator power control center and enable it to provide
regulation, frequency support, and when directed by the independent system
operator, voltage support.

         Westover Unit 7 is a non-reheat unit which came online in 1943 and
currently has a net generating capacity of 43MW. It is comprised of a steam
turbine generating unit manufactured by Westinghouse Electric, which is supplied
steam by two Foster-Wheeler coal-fired steam generators.

         In 1994 and 1995, Unit 7 was modified to operate as a synchronous
condenser, which enables the unit to provide system regulation, a revenue
producing ancillary service. Since then, it has been reconverted to a generator
and is presently operated intermittently to meet load demand.

         Westover Unit 8 is a reheat unit which came online in 1951 and
currently has a net generating capacity of 83MW. It is comprised of a steam
turbine generating unit manufactured by Westinghouse Electric, which is supplied
steam from a Combustion Engineering coal-fired steam generator. Unit 8 operates
to meet system load demands and to provide transmission support. Steam from the
facility is sold to Lockheed-Martin, a national defense contractor having a
facility located adjacent to the site. Steam sales in 1999 were approximately
$145,000.

         Environmental

         During 1998, NYSEG shut down Westover Unit 7 for 2,139 hours between
February and May due to market conditions and to assure compliance with NOX
emission reduction requirements. We believe that the installation of a selective
catalytic reduction system at the Somerset Generating Station will generate
sufficient NOX allowances and sufficient NOX emissions rate reductions to permit
us to run the Westover Generating Station at all times.

         NOX software was installed at Westover Unit 8 to predict the NOX
emissions and maintain plant heat rates under various operating conditions.

         In 1988, NYSEG began a water treatment and control program in response
to tightened permit limitations under New York State environmental laws. NYSEG
also installed or upgraded facilities to collect and treat water from yard, roof
and in-plant drains, maintenance cleaning washes and coal-pile runoff. A new
coal pile liner was installed in 1989 which has decreased leachate derived
concentrations of several metals in downgradient wells. While continued
groundwater monitoring will be required in the coal pile area, we do not expect
that additional investigation or mitigation will be needed.

         Fly ash, bottom ash and pulverizer mill rejects from the Westover
Generating Station were in the past disposed at the Weber ash disposal site in
the Town of Fenton, New York. We expect that the Weber ash disposal site will be
required to stop accepting ash in 2000 and will be closed in 2001 in accordance
with a consent order that AES Creative Resources, L.P. entered into in October
1999 with the New York State Department of Environmental Conservation. We plan
to evaluate other options for disposing of ash in the future, including disposal
at other landfills in the area. Our subsidiary, AEE2, L.L.C., has agreed to
contribute two-thirds of the closure costs for the Weber ash disposal site
(approximately


                                       16
<PAGE>


$2 million) based on the amount of ash disposed at the site from AEE2, L.L.C.'s
facilities compared to the amount disposed from the facilities acquired by AES
Creative Resources, L.P., which is a subsidiary of The AES Corporation but not
of us.

         Transmission

         The Westover Generating Station is interconnected to the New York power
pool bulk transmission system via six 115kV transmission lines and twelve 34.5kV
lines.

         Greenidge Generating Station

         The Greenidge Generating Station is located on the west shore of Seneca
Lake adjacent to the village of Dresden, New York, and began generating
electricity in 1938. Units 1 and 2 have been retired and physically removed. The
Greenidge Generating Station presently consists of two coal-fired units, Unit 3
and Unit 4, with a combined maximum net generating capacity of 161MW. In 1999,
the Greenidge Generating Station generated approximately 12% of the total annual
production of our electricity generating stations.

         The Greenidge Generating Station is capable of providing both operating
reserves available immediately and on ten minutes notice. The station is
equipped with Automatic Generating Controls, which connect it to the New York
independent system operator power control center and enable it to provide
regulation, frequency support, and, when directed by the independent system
operator, voltage support.

         Unit 3 utilizes two Babcock & Wilcox coal-fired steam generators,
supplying steam to a non-reheat steam turbine generator manufactured by General
Electric that came online in 1950 and currently has a net generating capacity of
56MW.

         Unit 4 is a reheat steam turbine generator manufactured by General
Electric which came online in 1953 and currently has a net generating capacity
of 105MW. It is supplied steam from a single Combustion Engineering coal-fired
steam generator.

         Environmental

         The advanced gas reburning system, which is a research and development
project at the Greenidge Generating Station, began in 1996 and is the first
full-scale demonstration of this technology. The goal of this research and
development project is to demonstrate a NOX reduction capability approaching
conventional selective catalytic reduction system process, but at a much lower
capital and operational cost. Various system configurations will be tested
throughout the three-year test program. In addition, the system can utilize
natural gas, up to 25% by heat input (25MW), to lower the level of SO2 emissions
and provide fuel switching capability to permit maintenance of pulverized coal
equipment.

         The Greenidge Generating Station is also permitted to burn a variety of
alternative fuels, including construction/demolition wood, clean wood, waste
woods, particle board, and sander fines. The system can burn almost 80 tons of
wood per shift, which would equate to about 10MW of capacity. This provides the
station with a lower SO2 emissions rate, lower fuel costs, and 10MWh of
environmentally attractive power. The Greenidge Generating Station is also
permitted to burn waste oil. The facility has also successfully test burned
paper and plastic products, the use of which can reduce fuel costs by 10-15%.

         Ash from the Greenidge Generating Station is disposed at the Lockwood
ash disposal site, which is located approximately one-half mile west of the
Greenidge Generating Station. We assumed responsibility for the Lockwood ash
disposal site in connection with the Asset Purchase Agreement with NYSEG.

         In an area adjacent to the Lockwood ash disposal site, our
environmental consultant reported that approximately 500 to 700 drums of
abrasives were disposed in the early 1970s and covered with ash. We have
budgeted $520,000 to conduct a site investigation and remove the drums. In
addition, groundwater sampling in this area and around the Lockwood ash site
indicates that some monitoring wells have parameters which exceed state
regulatory limits. We have budgeted $6 million in closure costs for the disposal
site with closure of a portion of the landfill scheduled for 2006 and closure of
the remaining acres projected for 2016. These costs also include annual
groundwater monitoring costs. We also budgeted approximately $2 million for the
share of closure and post-closure expenses that our subsidiary, AEE2, L.L.C.,
has agreed to bear with respect to the closure of the Weber ash disposal site.


                                       17
<PAGE>


         Coal pile leachate indicator compounds have been detected in
downgradient wells at the Greenidge Generating Station at levels exceeding state
regulatory limits. This may indicate that the coal pile liner has been breached
and requires replacement. We have budgeted replacement of the liner and
continued groundwater monitoring in the coal pile area.

         Transmission

         The Greenidge Generating Station is interconnected to the New York
power pool bulk transmission system via four 115kV transmission lines and three
34.5kV lines.


Regulation

         Energy Regulatory Matters

         General

         We and our ownership and operation of our electricity generating
stations are regulated under numerous federal, state and local statutes and
regulations. Among other aspects of electric generation, these statutes and
regulations govern the rates that we may charge for the output of our
electricity generating stations, establish in certain instances the operating
parameters of our electricity generating stations, and define standards for
ownership of our electricity generating stations. While there exists a strong
interest at both the federal and state level to deregulate certain aspects of
the electric generation industry, we currently remain subject to extensive
regulation.

         Federal Energy Regulation

         Federal Power Act. Under the Federal Power Act, the Federal Energy
Regulatory Commission possesses exclusive rate-making jurisdiction over
wholesale sales of electricity and transmission in interstate commerce. FERC
regulates the owners of facilities used for the wholesale sale of electricity
and transmission in interstate commerce as "public utilities" under the Federal
Power Act.

         Pursuant to the Federal Power Act, all public utilities subject to
FERC's jurisdiction are required to obtain FERC's acceptance of their rate
schedules in connection with the wholesale sale of electricity. Our rate
schedule was approved by FERC as a market-based rate schedule and, accordingly,
FERC granted us waivers of the principal accounting, record-keeping and
reporting requirements that otherwise are imposed on utilities with a cost-based
rate schedule.

         Public Utility Holding Company Act. The Public Utility Holding Company
Act ("PUHCA") provides that any corporation, partnership or other entity or
organized group that owns, controls or holds power to vote 10% or more of the
outstanding voting securities of a "public utility company" or a company that is
a "holding company" of a public utility company is subject to regulation under
PUHCA, unless an exemption is established or an order is issued by the SEC
declaring it not to be a holding company. Registered holding companies under
PUHCA are required to limit their utility operations to a single integrated
utility system and to divest any other operations not functionally related to
the operation of the utility system. In addition, a public utility company that
is a subsidiary of a registered holding company under PUHCA is subject to
financial and organizational regulation, including approval by the SEC of
certain of its financing transactions. However, under the Energy Policy Act of
1992, a company engaged exclusively in the business of owning and/or operating a
facility used for the generation of electric energy exclusively for sale at
wholesale may be exempted from PUHCA regulation as an "exempt wholesale
generator." On February 5, 1999, we received exempt wholesale generator status
from FERC for our ownership and operation of generation and associated
facilities. If, after having received this status, there is a "material change"
in facts that might affect our continued eligibility for exempt wholesale
generator status, within 60 days of this material change, we must (a) file a
written explanation of why the material change does not affect our exempt
wholesale generator status, (b) file a new application for exempt wholesale
generator status or (c) notify FERC that we no longer wish to maintain exempt
wholesale generator status. However, if we should lose exempt wholesale
generator status, then we would either have to restructure ourselves or risk
subjecting ourselves and our affiliates to PUHCA regulation.

         State Regulation. In New York State, recent legislation has
significantly deregulated the rate setting aspects of the industry. However,
significant risks remain, including, but not limited to, the potential that the
state deregulation initiatives are not implemented in the manner anticipated by
us or that they could be reversed or nullified. We


                                       18
<PAGE>


have obtained authorization from the New York State Public Service Commission
for the issuance of the pass through trust certificates and the incurrence of
debt pursuant to the working capital credit facility with Credit Suisse First
Boston.

         Lease Transactions Filings and Approvals. As conditions to completion
of the lease transactions relating to the Somerset Generating Station and the
Cayuga Generating Station, we and the appropriate financial participants in the
lease transactions were required to obtain certain approvals from FERC. We
obtained all of our approvals, including authorization to sell wholesale
electric energy under our market-based rate schedule and related waivers and
blanket authorization. We believe that the special purpose business trusts have
obtained all energy-related approvals required to be obtained by them. The
special purpose business trusts have been included in the approval by FERC of
the transfer of jurisdictional facilities and the acquisition and leaseback of
FERC-jurisdictional facilities, and FERC has granted a disclaimer of
jurisdiction over each of the institutional investors and the special purpose
business trusts and the trustees of those trusts as public utilities under Part
II or III of the Federal Power Act. The special purpose business trusts have
received determinations from FERC that they are exempt wholesale generators. The
special purpose business trusts obtained a no-action letter from the SEC staff
that no enforcement action would be recommended against them under PUHCA if they
proceeded with the lease transactions prior to obtaining exempt wholesale
generation determinations from FERC.

         Environmental Regulatory Matters

         General

         As is typical for electric generators, our electricity generating
stations are required to comply with federal, state and local environmental
regulations relating to the safety and health of personnel and the public,
including

         o  the identification, generation, storage, handling, transportation,
            disposal, recordkeeping, labeling, reporting of and emergency
            response in connection with hazardous and toxic materials associated
            with our electricity generating stations;

         o  limits on noise emissions from our electricity generating stations;

         o  safety and health standards, practices and procedures applicable to
            the operation of our electricity generating stations; and

         o  environmental protection requirements, including standards and
            limitations relating to the discharge of air and water pollutants.

         Failure to comply with any of these statutes or regulations could have
material adverse effects on us, including the imposition of criminal or civil
liability by regulatory agencies or civil fines and liability to private
parties, and the required expenditure of funds to bring our electricity
generating stations into compliance. In addition, pursuant to the Asset Purchase
Agreement with NYSEG, we (as assignee of AES NY, L.L.C.) have, with a few
exceptions, agreed to indemnify NYSEG against the consequences of NYSEG's
handling, storage or emission of hazardous and toxic materials on any of the
sites of our electricity generating stations and the Lockwood off-site ash
disposal site and for NYSEG's past non-compliance, if any, with environmental
requirements.

         It is likely that the stringency of environmental regulations affecting
us and our operations will increase in the future. In the meantime, we will
monitor potential regulatory developments that may impact our operations and we
will participate in rulemaking proceedings applicable to our operations when we
consider it advisable to do so. We do not expect any currently proposed
regulations to have a material adverse effect on our operations or our financial
condition.

         Expenditures. Compliance with environmental standards will continue to
be reflected in our capital expenditures and operating costs. Based on the
current status of regulatory requirements and other than the expenditures for
the Somerset selective catalytic reduction system, including the construction of
new landfill space to manage ash from selective catalytic reduction system
operations, and possible expenditures for a Cayuga selective catalytic reduction
system, we do not anticipate that any capital expenditures or operating expenses
associated with our compliance with current laws and regulations will have a
material effect on our operations or our financial condition. See "Air
Emissions--Nitrogen Oxides."


                                       19
<PAGE>


         Air Emissions

         The federal Clean Air Act and many state laws, including the laws of
the State of New York, require significant reductions in utility SO2 and NOX
emissions that result from burning fossil fuels in order to reduce acid rain and
ground-level ozone (smog).

         Sulfur Dioxide (SO2). SO2 emissions are regulated under Title IV of the
federal Clean Air Act Amendments and by the New York Acid Deposition Control
Act. One of the primary goals of Title IV of the Amendments was to reduce SO2
emissions by 10 million tons from 1980 levels. The SO2 emission reduction
requirements generally apply to almost all fossil-fuel fired electric generating
units producing electricity for sale. Power plants subject to Title IV are
required to obtain acid rain permits, to hold sufficient emission allowances to
cover their SO2 emissions, and to comply with various monitoring and
recordkeeping requirements. The federal SO2 requirements are implemented in two
phases--Phase I applies to the 110 plants listed in section 404 of the Act and
Phase II generally affects all other electric generating plants selling over
25MW to the electricity distribution grid. Phase I of the federal Clean Air Act
Amendments SO2 program went into effect January 1, 1995, with Cayuga 1 and 2 and
Greenidge 4 falling under the program. Phase II went into effect January 1, 2000
and affects all units.

         Flue gas desulfurization systems or "scrubbers" are operated at both
the Somerset Generating Station and the Cayuga Generating Station to reduce
total SO2 emissions from these plants to quantities substantially below the
Title IV SO2 "allowance" allocations for the units at these plants. An allowance
is a freely transferable right to emit one ton of a substance, in this case,
SO2. The excess allowances are accumulated and can either be used for our other
electricity generating stations or sold to provide liquidity to us. We may sell
SO2 allowances rather than save them for Phase II of Title IV of the federal
Clean Air Act Amendments. During Phase II, we may need to purchase SO2
allowances beginning in 2000 to cover SO2 emissions for the Greenidge Generating
Station and the Westover Generating Station. Market prices for SO2 allowances
currently range from $133 to $140 per ton. We believe that, with minor
operational changes and minimal additional expenditure, we could improve the
efficiency of our scrubbers by 10% or more, which would compensate for most, if
not all, of the possible shortfall of SO2 allowances for the stations. We
believe that the annual cost of the additional sulfur control and the purchasing
of SO2 allowances would not be material.

         On October 14, 1999, New York Governor Pataki announced a new
initiative which directs the New York State Department of Environmental
Conservation to issue regulations requiring electric generators to reduce SO2
emissions by another 50% below Phase II standards. The Governor is calling for
the new regulations to be phased in starting on January 1, 2003 with
implementation completed by January 1, 2007. If enacted, the Governor's
initiative has the potential to require further SO2 reductions at our electric
generating stations and may necessitate that either additional SO2 emission
controls be installed, lower sulfur coal be utilized or surplus SO2 allowances
be purchased. We are not currently in a position to quantify the potential costs
of complying with the Governor's SO2 initiative; however, if enacted by the New
York State Legislature, the costs of compliance could be substantial.

         In addition, on October 14, 1999, we received an information request
letter from the New York Attorney General which seeks detailed operating and
maintenance history for the Westover and Greenidge Generating Stations. On
January 13, 2000, we received a subpoena from the New York State Department of
Environmental Conservation seeking similar operating and maintenance history for
all four of our electricity generating stations. This information is being
sought in connection with the Attorney General's and the Department of
Environmental Conservation's investigations of several electric generation
stations in New York which are suspected of undertaking modifications in the
past (from as far back as 1977) without undergoing an air permitting review.
Both the Governor's initiative and the Attorney General's and the Department of
Environmental Conservation's investigations have the potential of triggering
further emission reductions at our plants and possibly resulting in the
necessity of installing additional emissions control equipment. If the Attorney
General or the Department of Environmental Conservation does file an enforcement
action against the Westover and Greenidge Generating Stations, then penalties
may also be imposed.

         Nitrogen Oxides (NOX). New York State and the other states in the
Mid-Atlantic and Northeast region are classified as the Ozone Transport Region
in the federal Clean Air Act, which designates the Ozone Transport Region as
being not in compliance with the ozone National Ambient Air Quality Standard.
The states in the Ozone Transport Region have agreed to implement a three-phase
process to reduce NOX emissions in the region in order to comply with the
federal Clean Air Act Title I requirements for ozone non-compliance areas. NYSEG
complied with Phase I through operational modifications to reduce NOX emissions,
reduction of electric output from selected generating units to reduce emissions
to cap levels, and installation of NOX reduction equipment on selected
generating units.


                                       20
<PAGE>


         The Phase I regulations require facilities in New York State to
implement NOX control requirements based on reasonably available control
technology. The New York State Department of Environmental Conservation has
approved a facility-wide plan for the former NYSEG generating plants to take
advantage of operating flexibility offered by grouping the plants together under
a common NOX emissions averaging plan. Under this approach, a system-wide
emission rate limit is continually calculated based upon which of the former
NYSEG plants are operating. By emitting into a common compliance averaging plan,
or "bubble," electricity generating stations that emit well below the
system-wide limit reduce the overall average for electricity generating stations
that emit in excess of the system-wide limit.

         Implementation of the Phase II emission rules commenced on May 1, 1999.
The Phase II NOX regulations set forth a NOX allowance allocation program which
is expected to give us 6,292 NOX emission allowances annually. Each allowance
will authorize us to emit one ton of NOX during the ozone season (May 1 to
September 30), beginning in 1999.

         To comply with the stricter emissions regulations beginning in 1999, we
installed a selective catalytic reduction system at the Somerset Generating
Station which became operational in June 1999.

         The NOX requirements that took effect on May 1, 1999 essentially
require that the former NYSEG plants keep their summertime ozone season (May
1-September 30) NOX emissions within a specific budget of NOX emissions
allowances. If the total emissions during this period are below the budget
total, we can sell the excess allowances to companies that emit more than their
budget. Operation of the Somerset selective catalytic reduction system makes it
likely that the total NOX emissions will be below budget. During the 1999 ozone
season, we achieved a removal efficiency of between 70% and 90% for the Somerset
selective catalytic reduction system; however, we anticipate that technical
problems that we experienced during start up of the system will be resolved in
time for the 2000 ozone season.

         The Somerset Generating Station is expected to accumulate approximately
3,400 excess allowances per year from 1999 to 2002 and approximately 2,500
excess allowances from 2003 onwards. A portion of our compliance strategy
involves the selling or trading of excess allowances. We expect that we will be
permitted to sell these excess allowances or to trade them, including trades
between our electricity generating stations as needed to offset NOX emissions at
our other electricity generating stations. We are currently permitted to sell or
accumulate NOX allowances for use in future years. However, we believe that
accumulated allowances may be subject to discounting depending on the ratio of
total accumulated allowances in the state to New York's state-wide NOX budget.
We expect that accumulated allowances would be subject, at most, to a 2-to-1
discount in some future years.

         The accumulated allowances would allow each of our electricity
generating stations to run at their planned capacity factors through 2003, when
the likely more stringent Phase III NOX regulations are imposed. Since the Phase
III program is still under development, it is difficult for us to predict the
size of the allowance shortfall, if any, that may exist at that time. We may
decide to install a second selective catalytic reduction system at the Cayuga
Generating Station in order to continue operation of each of our electricity
generating stations at full planned capacity factors during Phase III. We are
also considering other compliance strategies, however, such as the addition of a
selective non-catalytic reduction system as well as repowering the smaller
plants. Considered in the aggregate, we project that our electricity generating
stations will create 2,000 excess allowances per year through 2002 and, if a
selective catalytic reduction system is installed at the Cayuga Generating
Station, 400 excess allowances per year after 2002.

         New York Governor Pataki's October 14, 1999 initiative also directs the
New York State Department of Environmental Conservation to issue regulations
requiring electric generators to impose stringent NOX reduction requirements on
a year-round basis, rather than just during the summertime ozone season. The
Governor is calling for the new regulations to be phased in starting on January
1, 2003 with implementation completed by January 1, 2007. If enacted, the
Governor's initiative has the potential to require further NOX emission
reductions at our electricity generating stations and may necessitate the
installation of additional emissions control equipment at certain stations.

         The capital cost of the Somerset Generating Station selective catalytic
reduction system was $31 million. We expect that the system will operate for 20
years at which time we will need to replace the catalyst at an estimated cost of
$4.5 million in 1999 dollars.

         Our electricity generating stations have generally achieved continuous
compliance with the current NOX reduction requirements with the exception of a
one-time violation of the facility-wide NOX emission cap in May 1998. We believe
that, under the Asset Purchase Agreement with NYSEG, any penalty assessed for
that exceedence would be the responsibility of NGE Generation, Inc.


                                       21
<PAGE>


         Particulates and Opacity. Each of our electricity generating stations
is currently in compliance with particulate emission limits.

         Each of our electricity generating stations is required to meet an
opacity limit. In the past, several of the plants exceeded these limits on
various occasions. This was a common problem at coal-fired electricity
generating plants, and the New York State Department of Environmental Protection
has initiated an enforcement action against several utilities, including NYSEG.
Potential fines and required actions cannot be divulged to the public until a
final settlement is reached. Nevertheless, it would appear that any consent
order will likely have additional monitoring and equipment upgrade requirements,
especially involving upgrades to the electrostatic precipitator at the Greenidge
Generating Station. NYSEG has performed much of this work at NYSEG's expense.

         We recently received a draft consent order from the New York State
Department of Environmental Conservation that alleges violations of the opacity
emission limitations in the air permits for the Cayuga, Westover, and Greenidge
Generating Stations occurring since our electricity generating stations were
purchased from NYSEG. The draft consent order would require us to prepare an
opacity compliance plan and would impose penalties for opacity violations
occurring after May 14, 1999, the date of the acquisition. We expect to enter a
final consent order with the Department of Environmental Conservation early in
2000. AES NY, L.L.C. also recently received notice from NYSEG that NYSEG has
received a draft consent order from the Department of Environmental Conservation
seeking penalties primarily for opacity violations occurring prior to May 14,
1999. In the notice, NYSEG asserts that it will seek indemnification from AES
NY, L.L.C. for any penalties, attorney fees, and related costs that it incurs in
connection with the consent order. We and AES NY, L.L.C. have denied liability
for the pre-closing violations and intend to vigorously defend this claim if
NYSEG pursues litigation or arbitration.

         Carbon Dioxide (CO2). Environmental concerns related to the impacts of
greenhouse gases (e.g., carbon dioxide, "CO2") led to the adoption in 1992 of
the United Nations-sponsored Framework Convention, which was ratified by over
150 countries, including the United States. In 1993, President Clinton committed
the United States to limit CO2 and other climate-altering gas emissions to their
1990 levels by the year 2000. However, it became apparent that this goal was
unlikely to be met by most industrialized nations. The Kyoto Conference was
called in December 1997 to expedite a global climate treaty supported by the
United States. If adopted by the participating nations, any legally binding
global climate treaty will have significant economic consequences for all U.S.
industries, including the electricity generating industry.

         The AES Corporation has been on the leading edge of creating CO2 offset
projects since 1988 when it started its own project in Guatemala to offset the
emissions from the AES Thames electricity generating station in Connecticut.
Since that time, The AES Corporation has procured four additional projects to
offset CO2 emissions from other facilities. All of these projects have been
completed at cost-effective margins (that is, approximately 10 cents per ton).
If a legally binding global climate treaty is adopted, cost-effective greenhouse
gas mitigation projects like these may not be available to offset emissions from
our electricity generating stations in the future, especially if numerous other
facilities in the United States and elsewhere are competing for the necessary
CO2 reduction credits.

         Water Issues

         The federal Clean Water Act prohibits the discharge of any pollutant
(including heat), except in compliance with a discharge permit issued by the
states or the federal Environmental Protection Agency for a term of no more than
five years. There is potential uncertainty with permitting issues in the future,
but much of the uncertainty on these issues is industry-wide because of new
regulatory requirements for cooling water discharges under the National
Pollutant Discharge Elimination System program.

         Our electricity generating stations and their ash disposal sites have
been designed and are operated to comply with strict water and wastewater
compliance standards. Groundwater protection measures include coal pile liners
at all stations, lined active ash disposal sites, no active fly ash settling
ponds, and a network of approximately 400 groundwater monitoring wells. New York
State has not only technology-based effluent limitations for surface water
discharges, but is one of the first states in the nation to impose more
restrictive limits on wastewater discharges to ensure that very protective water
quality-based standards are maintained. Our electricity generating stations have
numerous wastewater treatment facilities in order to ensure compliance with
these restrictive discharge limits. In addition, the Somerset Generating Station
normally operates in a zero process wastewater discharge mode, reusing
wastewater for various plant processes. Similarly, the ash disposal sites must
comply with both technology and water quality-based discharge limits. Where
necessary, lime treatment is employed to remove metals from ash site wastewater
prior to discharge.


                                       22
<PAGE>


         In August 1998, NYSEG received notice of intent to file a citizen suit
with the New York State Department of Environmental Protection regarding an
alleged water discharge limit exceedence at the Somerset Generating Station.
NYSEG has advised us that no citizen suit has been filed in connection with this
matter. If this suit is filed, we believe that under the Asset Purchase
Agreement any liability would be the responsibility of NYSEG.

         Hazardous Material and Wastes

         The electric utility industry typically uses and/or generates in its
operations a range of potentially hazardous products and by-products. We have
identified a number of site remediation issues at our electricity generating
stations. Under the terms of the Asset Purchase Agreement, NYSEG will retain
pre-closing off-site environmental liabilities associated with our electricity
generating stations (other than liabilities arising from the Weber and Lockwood
ash disposal sites), but we will assume responsibility for contamination at our
electricity generating stations and at the Lockwood ash disposal site.

         We have budgeted $9.8 million for the cost for environmental
liabilities at our electricity generating stations (excluding closure and
post-closure costs for the Weber and Lockwood ash disposal sites), based on
estimates of environmental consultants retained by NYSEG and The AES
Corporation. We have budgeted approximately $6 million for closure and
post-closure (monitoring and maintenance) expenses for the Lockwood ash disposal
site, based solely on amounts previously budgeted for these activities by NYSEG.
AES Creative Resources, L.P. assumed responsibility for the Weber ash disposal
site. Our subsidiary, AEE2, L.L.C., has agreed to contribute two-thirds of the
closure costs for the Weber ash disposal site (estimated at approximately $2
million) based on the amount of ash disposed at the site from the Westover
Generating Station and the Greenidge Generating Station, which are owned by
AEE2, L.L.C., compared to the amount disposed from the Hickling Generating
Station and the Jennison Generating Station, which were acquired by AES Creative
Resources, L.P.

         In October 1999, AES Creative Resources, L.P. entered into a consent
order with the New York State Department of Environmental Protection to resolve
alleged violations of the water quality standards in the groundwater
downgradient of the Weber ash disposal site. The consent order includes a
suspended $5,000 civil penalty and a requirement to submit a work plan to
initiate closure of the landfill by October 8, 2000. The consent order also
calls for a site investigation and there is a possibility that some groundwater
remediation at the site may be required. AEE2, L.L.C. will contribute two-thirds
of the costs to close the landfill, which are anticipated to be approximately $3
million, as well as additional costs for long-term groundwater monitoring. While
the actual closure costs may exceed $3 million, we do not expect any added
closure costs to be material. Nevertheless, if a groundwater remediation is
required, these costs have not been budgeted, and AEE2, L.L.C. may be
responsible for a portion of such costs.

         These projected environmental cost estimates are not a guarantee that
additional environmental liabilities will not be incurred, and it is possible
that the actual costs could be significantly higher. In addition, it is possible
that previously unknown environmental conditions will be discovered in the
future.

         Because the new selective catalytic reduction system at the Somerset
Generating Station may result in ammonia-contaminated fly ash, we expect to
develop a new area, Area 3, of the on-site landfill located at the Somerset
Generating Station to contain the ammoniated ash. Area 3 will also be used for
disposal of ammoniated sludge produced during flue gas desulfurization system
operation while the selective catalytic reduction system is also in operation
(May 1 to September 30). Area 3 will comply with modern landfill design and
performance standards and will be built with a synthetic liner and a leachate
collection system. The disposal area could not be completed in time for
commencement of operation of the selective catalytic reduction system at the
Somerset Generating Station and we will manage the ash and sludge in the lined
coal pile storage area until the disposal area is ready to receive it. On April
26, 1999, the New York State Board on Electric Generation Siting and the
Environment approved the plan to use Area 3, subject to approval by the New York
State Department of Environmental Protection of more detailed design
submissions, and approved the use of the coal pile storage area for the
temporary storage of the ammoniated ash.

         The Somerset landfill is under the jurisdiction of the Public Service
Commission. NYSEG's original compliance filing with the Public Service
Commission in 1983 provided that the landfill would be constructed in a 200 acre
section of the site, which NYSEG divided into three areas (Areas 1, 2, and 3).
The landfill was designed to comply with the then-existing solid waste landfill
standards of the New York State Department of Environmental Conservation. Each
area was to receive a separate landfill unit lined with a low permeability
material, usually clay. However, the first 17-acre section of Area 1 of the
landfill was lined with compacted soil only. To date, only Area 1 has been used
by NYSEG. The Area 1 landfill


                                       23
<PAGE>


has been expanded six times during the years since 1983. When a portion of Area
1 reaches the maximum allowable elevation (130 feet), it is "capped" by adding
compacted soil and planting ground cover. The entire process is meant to be
self-implementing, with little input from the Public Service Commission unless
there is a problem or a change in design or operation.

         In the period since the original approval of the Somerset landfill, the
Department of Environmental Conservation has modified its solid waste landfill
regulations extensively. As a result of these changes, these regulations
currently allow construction or expansion of landfills only with low
permeability liners and sophisticated leachate collection systems, and impose
higher standards for capping and closing solid waste facilities.

         Groundwater conditions present at the Somerset site make it very
difficult to distinguish between landfill leachate and naturally occurring
substances in the groundwater. Substances that are typically considered
indicators of leachate infiltration into groundwater from ash monofill
operations, namely sulfates, iron and manganese, are also naturally occurring in
the groundwater around and beneath Area 1. NYSEG commissioned independent
consultants to perform groundwater testing using sophisticated geochemical
fingerprinting techniques, which distinguish the major ions of a water sample.
NYSEG's consultants have shown, to the satisfaction of the Public Service
Commission, that there has been no material release of leachate from Area 1 into
the groundwater.

         In April 1999, the Department of Environmental Conservation and the
Public Service Commission negotiated a Memorandum of Understanding that
clarifies their respective roles with respect to the regulation of the Somerset
landfill. According to the Memorandum of Understanding, the Public Service
Commission's decisions will continue to control all aspects of Areas 1 and 2 of
the landfill, but the Public Service Commission must defer to current and future
Department of Environmental Conservation regulations, standards and policies
with respect to the development, use and closure of Area 3. The Memorandum of
Understanding was approved by the New York State Board on Electric Generation
Siting and the Environment and was incorporated as part of the April 26, 1999
amendment to the Certificate of Environmental Compatibility for the Somerset
Generating Station that we received in connection with installation of the
selective catalytic reduction system.

         Factors which could cause actual costs of disposal in Areas 1, 2 and 3
to vary include, but are not limited to, adoption of more stringent solid waste
landfill regulations by the Department of Environmental Conservation, the
discovery of groundwater contamination from Area 1, and escalation of the costs
of landfill development.

         Exceedences of state groundwater standards at the Cayuga Generating
Station were reported in the vicinity of the coal pile area, the coal pile
runoff pond, and the ash disposal site. In 1997, a new liner was installed under
the coal pile. We have budgeted monitoring and investigation costs of $270,000
for the coal pile runoff pond and $163,000 for the disposal area. We have
included these costs in our financial projections.

         In an area adjacent to the Lockwood ash disposal site, our
environmental consultant reported that approximately 500 to 700 drums of
abrasives were disposed in the early 1970s and covered with ash. We have
budgeted $520,000 to conduct a site investigation and remove the drums. In
addition, groundwater sampling in this area and around the Lockwood ash disposal
site indicates that some monitoring wells have parameters which exceed state
regulatory limits. As noted above, we have budgeted $6 million in closure and
post-closure (monitoring and maintenance) costs for the Lockwood ash disposal
site.

         Based on a 1988 study, the federal Environmental Protection Agency
("EPA") does not regulate most coal combustion ash as a hazardous waste. In a
report to Congress in March 1999, the EPA tentatively concluded that coal
combustion ash should remain exempt from regulation, but the EPA is expected to
publish a regulatory "determination" on this subject by April 10, 2000. We have
recently learned that the EPA is considering moving in the direction of making a
major change in the regulation of coal ash, possibly requiring that some coal
combustion ash be regulated as a hazardous waste. The standards and criteria
that would trigger such regulation would have to be developed by the EPA in
future rulemaking proceedings, possibly after additional ash studies. We cannot
predict the timing or the outcome of such regulatory actions at this time. If
the EPA decides to, and succeeds in, regulating coal ash as a hazardous or
special waste, we could incur additional ash management or disposal costs from
our plants.


                                       24
<PAGE>


         Noise

         Noise emissions from our electricity generating stations are regulated
pursuant to New York law which establishes different acceptable noise levels
based upon the nature of the neighboring property uses, with the lowest being
noise standards that must be met at residential properties. In general,
compliance with noise standards is not a material concern with respect to our
electricity generating stations.

         The Certificate of Environmental Compatibility that was issued to NYSEG
in 1978 for the development and operation of the Somerset Generating Station
contains a number of requirements for mitigating environmental impacts from the
facility, including noise impacts. Among the noise requirements was an
obligation to obtain noise easements from neighboring landowners or, as
subsequently approved by the Public Service Commission, to purchase their
property in a buffer zone where noncompliance with noise standards was expected
to occur. Subsequent analyses predicted that these exceedences would occur only
in connection with ash disposal operations when Area 2 of the Somerset landfill
was constructed. Prior to the acquisition of our electricity generating
stations, NYSEG had purchased neighboring properties for a combined cost
totaling approximately $1.5 million and had a standing offer to purchase the
remainder. We obtained an appraisal of the remaining properties which places
their aggregate current value at approximately $3.1 million. We have not
budgeted any amount for the acquisition of these properties. The Public Service
Commission has also required that a noise mitigation plan be developed and
submitted for Public Service Commission approval at least one year prior to
commencement of Area 2 development. The Public Service Commission could require
additional noise control measures at that time. We do not expect that the noise
compliance costs we may incur, including as a result of taking over the land
purchase program, will be material.


People

         As of December 1999, we employed 319 people who operate our electricity
generating stations. The International Brotherhood of Electrical Workers (the
"IBEW") represents hourly labor at the Somerset Generating Station, the Cayuga
Generating Station, the Westover Generating Station and the Greenidge Generating
Station. The IBEW represents approximately 246 workers. Pursuant to the terms of
the Asset Purchase Agreement with NYSEG, we (as assignee) were required to offer
employment to substantially all of the people employed by NYSEG at our
electricity generating stations. We were also required to assume the collective
bargaining agreement for our electricity generating stations between NYSEG and
the IBEW. The term of the collective bargaining agreement ends on June 30, 2000
but will automatically renew from year to year unless terminated by either party
upon 60 days' notice. We retained a substantial majority of the NYSEG workforce
at each of the electricity generating stations. We believe that relations with
the people employed at our electricity generating stations are satisfactory.


Item 2.  Properties

         The following table shows the material properties which we or our
subsidiaries own or lease. See "Business--The Electricity Generating Stations"
for more information about these properties.
<TABLE>
<CAPTION>

Electricity Generating
        Station                 Location              Capacity       Owned or Leased     Expiration of
                                                                                           Lease
------------------------   --------------------   -----------------  ----------------  ------------------
<S>                      <C>                    <C>                 <C>               <C>
Somerset                   Barker, NY             675MW              Leased*           February 13, 2033

Cayuga                     Lansing, NY            306MW              Leased*           November 13, 2027

Westover                   Johnson City, NY       126MW              Owned             Not Applicable

Greenidge                  Dresden, NY            161MW              Owned             Not Applicable
</TABLE>

------------------------
*   We own all of the land on which the Somerset and Cayuga Generating Stations
    are located and we lease the portion on which the facilities of those
    stations are located to the special purpose business trusts that own those
    facilities. We lease the facilities of those stations and sublease the land
    on which they are located from the special purpose business trusts.


                                       25
<PAGE>


Item 3.  Legal Proceedings

         AES Creative Resources, L.P. assumed responsibility for
asbestos-related personal injury suits in which NYSEG is named as one of
numerous defendants and AES NY, L.L.C., the general partner of our company and
of AES Creative Resources, L.P., and AES NY2, L.L.C., the limited partner of our
company and of AES Creative Resources, L.P., guaranteed the obligations of AES
Creative Resources, L.P. NYSEG agreed that it would not assert that we have
responsibility for these suits. As of March 20, 2000, 24 of these lawsuits were
pending.

         In August 1998, NYSEG received notice of intent to file a citizen suit
with the New York State Department of Environmental Protection regarding an
alleged water discharge limit exceedence at the Somerset Generating Station.
NYSEG has advised us that no citizen suit has been filed in connection with this
matter. If this suit is filed, we believe that under the Asset Purchase
Agreement any liability would be the responsibility of NYSEG.

         On October 14, 1999, we received an information request letter from the
New York Attorney General which seeks detailed operating and maintenance history
for the Westover and Greenidge Generating Stations. On January 13, 2000, we
received a subpoena from the New York State Department of Environmental
Conservation seeking similar operating and maintenance history for all four of
our electricity generating stations. This information is being sought in
connection with the Attorney General's and the Department of Environmental
Conservation's investigations of several electricity generating stations in New
York which are suspected of undertaking modifications in the past (from as far
back as 1977) without undergoing an air permitting review. If the Attorney
General or the Department of Environmental Conservation does file an enforcement
action against the Somerset, Cayuga, Westover or Greenidge Generating Stations,
then there is the possibility that penalties may be imposed and further emission
reductions may be required.

         We recently received a draft consent order from the New York State
Department of Environmental Conservation that alleges violations of the opacity
emission limitations in the air permits for the Cayuga, Westover, and Greenidge
Generating Stations. The draft consent order would require us to prepare an
opacity compliance plan and would impose penalties for opacity violations
occurring after the date of the acquisition of our electricity generating
stations, May 14, 1999. We expect to enter a final consent order with the
Department of Environmental Conservation early in 2000. AES NY, L.L.C. also
recently received notice from NYSEG that NYSEG has received a draft consent
order from the Department of Environmental Conservation seeking penalties
primarily for opacity violations occurring prior to May 14, 1999. In the notice,
NYSEG asserts that it will seek indemnification from AES NY, L.L.C. for any
penalties, attorney fees, and related costs that it incurs in connection with
the consent order. We and AES NY, L.L.C. have denied liability for the
pre-closing violations and intend to vigorously defend this claim if NYSEG
pursues litigation or arbitration.


Item 4.  Submission of Matters to a Vote of Security Holders

         Not applicable.


                                       26
<PAGE>


                                     PART II

Item 5.  Market for our Company's Common Equity and Related Stockholder Matters

         All outstanding equity interests in our company are owned indirectly by
The AES Corporation.


Item 6.  Selected Financial Data
<TABLE>
<CAPTION>

                                                                                           As of December
                                                                                              31, 1999
---------------------------------------------------- ------------------ ------------------ ----------------
<S>                                                                                       <C>
Balance Sheet Data (in millions)
Total Assets                                                                                   $ 1,133
Long-Term Liabilities                                                                          $   692
Partners' Capital                                                                              $   378

---------------------------------------------------- ------------------ ------------------ ----------------

---------------------------------------------------- ------------------ ------------------ ----------------
                                                                                           For the Period
                                                                                             from May 14
                                                                                                1999
                                                                                           (inception) to
                                                                                            December 31,
                                                                                                1999
---------------------------------------------------- ------------------ ------------------ ----------------


Statement Of Income Data (in millions)
Operating Revenue                                                                                $ 185
Operating income                                                                                 $  57
Net income                                                                                       $  24
</TABLE>

Item 7. Discussion and Analysis of Financial Condition and Results of Operations

         General

         We were formed on December 2, 1998 to acquire, lease and, through our
wholly owned subsidiaries, operate and improve our electricity generating
stations. We and the special purpose business trusts acquired our electricity
generating stations on May 14, 1999 for a purchase price of $914 million. In
order to fund the acquisition of our electricity generating stations (including
some adjustments and plus improvement costs, working capital and transaction
costs) and pay transaction expenses relating to the acquisition and the lease
transactions, The AES Corporation made an equity contribution of $354 million to
us (net of costs advanced by The AES Corporation for which we will reimburse
it), the institutional investors made an equity contribution of $116 million
through the special purpose business trusts and $550 million was raised for
purchase of the Somerset Generating Station and the Cayuga Generating Station
from the sale of pass through trust certificates.

         All four of our electricity generating stations operate as merchant
plants, which means that we will sell their output in power pool spot market
transactions or in transactions negotiated from time to time directly with
another party rather than selling the output under a long-term power sales
contract. As merchant plants, our electricity generating stations generally will
be dispatched, that is, they will supply electricity, whenever the market price
of electricity exceeds their variable cost of generating electricity. Our
revenue and income will be directly affected by the price of electricity, which
is usually highest during the summer and winter peak seasons.


                                       27
<PAGE>


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

         We expect to concentrate our business activities in the New York power
market for the foreseeable future. The markets for wholesale electric energy,
installed capacity and ancillary services in the New York power market were
largely deregulated in November 1999. In a competitive market where the order in
which electricity generating plants are dispatched will be based on bids for the
sale of electric energy made by owners of generating assets in the region, we
expect that owners of lower marginal cost facilities will bid lower prices and
therefore those facilities will be dispatched more often than higher marginal
cost facilities.

         We believe that our electricity generating stations are among the
lowest variable cost facilities in the New York power market. We also believe
that our electricity generating stations are among the most efficient coal units
in the region. We expect that our electricity generating stations will almost
always be dispatched. The efficiency of our electricity generating stations
provides several important advantages: a stable pricing structure, the ability
to benefit from energy price spikes in the market and relatively little risk
that our generating stations will be idle while other generating stations are
directed to run. Also, the Westover Generating Station and the Greenidge
Generating Station provide economically valuable flexibility because they can be
used to provide ancillary services when they are not fully dispatched.

         Our electricity generating stations have historically been available to
run a high percentage of the time due to the regulated utility-grade nature of
their design and construction. In 1999, the stations had a weighted average
(based on capacity) equivalent availability factor of 97% (excluding the outage
at the Somerset Generating Station during May and June 1999). Based upon the
historical experience of The AES Corporation, we believe that we can maintain or
improve the availability of our electricity generating stations.

         At the Cayuga Generating Station, we are currently planning major
maintenance outages of approximately 21 days each for Unit 1 in 2001 and Unit 2
in 2002. We will schedule these outages to avoid expected seasonal peaks in
demand for electric energy and we will schedule these outages to coincide with
normal, annual 10 to 14 day maintenance outages. We expect that there will be no
significant impact on our results of operations from these major maintenance
outages.

         We believe that we will also have opportunities to derive revenue from
sales of installed capacity and ancillary services. Under the terms of the
capacity purchase agreement with NYSEG, NYSEG will purchase all of our 1,268MW
of installed capacity at a price of $68 per MW-day until April 30, 2001. During
the term of the capacity purchase agreement, the rules of the New York ISO
system will require us to offer to sell our electric energy in the New York
market for delivery of electric energy on the following day. We will be
permitted to sell electric energy into other pools only when the energy is not
needed in the New York market. See "Business--Our Plan and Strategy--Electricity
Marketing Plan."

         NYSEG has brought a proceeding to obtain a refund of real estate taxes
it paid in connection with the Somerset Generating Station while NYSEG owned it.
NYSEG had little incentive to contest the tax valuation of its electricity
generating stations while it owned them because the real property taxes it paid
were included among the expenses it was permitted to recover through regulated
electricity rates and were therefore passed along to its customers. We had
identified real estate taxes as a potential area for cost savings. If NYSEG is
successful in obtaining substantial refunds of prior real estate taxes, our
potential savings may be to some extent nullified because the local governments
may be forced to raise real estate tax rates to bring revenues into balance with
expenditures. It is too early to tell what impact, if any, this will have on our
financial condition and results of operations.

         AES Creative Resources, L.P., another subsidiary of The AES Corporation
that we do not control and that does not control us, assumed from NYSEG
responsibility for asbestos-related personal injury lawsuits in which plaintiffs
claim they were exposed to asbestos while employed by independent contractors
providing services at the electricity generating stations acquired from NYSEG.
As of March 20, 2000, 24 of these lawsuits were pending. While we cannot
quantify the potential liability arising from these suits given the early stage
of the proceedings and the large number of named defendants, the plaintiffs have
claimed substantial compensatory and punitive damages. AES NY, L.L.C., the
general partner of our company and of AES Creative Resources, L.P., and AES NY2,
L.L.C., the limited partner of our company and of AES Creative Resources, L.P.,
guaranteed the obligations of AES Creative Resources, L.P.  See "Legal
Proceedings."


                                       28
<PAGE>


         Results of Operations

         We engaged in no operations between our formation in December 1998 and
May 14, 1999. There are no separate financial statements available with regard
to our electricity generating stations prior to May 14, 1999 because their
operations were fully integrated with, and therefore results of operations were
consolidated into, NYSEG. In addition, the electric output of our electricity
generating stations was sold based on rates set by regulatory authorities while
they were owned by NYSEG. As a result and because electricity rates will now be
set by the operation of market forces, the historical financial data with
respect to our electricity generating stations for periods prior to May 14, 1999
is not meaningful or indicative of our future results. Our results of operations
in the future will depend primarily on revenues from the sale of electric
energy, installed capacity and ancillary products, and the level of our
operating expenses.

         Energy revenue results from sales of electricity into the New York
power market and adjoining power pools. Capacity revenue results from our
commitment of our generating capacity to NYSEG under the capacity purchase
agreement that we entered into with NYSEG to satisfy NYSEG's requirement to
procure capacity commitments sufficient to meet its forecasted peak demand plus
a reserve requirement. Other revenue in the period ended December 31, 1999
resulted mainly from the sale of credits for the emission of nitrogen oxides.

         During the period from May 14, 1999 to December 31, 1999, we generated
revenues of $163 million from sales of electricity and $18 million from the
capacity purchase agreement with NYSEG. Operating expenses totaled $128 million
primarily due to fuel cost for electric generation of $71 million. Net interest
expense for the period was $33 million. Our net income during this period was
$24 million.

         The Somerset Generating Station was taken out of service from May 14,
1999 to June 28, 1999 to complete the installation of a selective catalytic
reduction system and to make other improvements to the station's turbine and
boiler. During the period from May 14 to June 28, 1999, net costs directly
related to the construction at the Somerset Generating Station were capitalized
and are included in electric generation assets on our balance sheet. Our
revenues and our energy generation costs were lower than usual during the period
from May 14, 1999 to June 28, 1999 because the Somerset Generating Station was
not in service for almost the entire period. Our revenues from sales of
electricity during the summer months were positively affected by the abnormally
high temperatures experienced in the northeastern United States and the
resulting high demand for electricity. As a consequence, our results of
operations during the period from May 14, 1999 to December 31, 1999 may not be
comparable with our results of operations during future periods or indicative of
our future results of operations.

         The pass through trust certificates have accrued additional interest at
the rate of 0.50% per annum from November 10, 1999 until we complete an exchange
offer for the pass through trust certificates as a result of our failure to
complete the exchange offer on or prior to November 10, 1999. We were obligated
to pay approximately $229,000 additional interest per month until we completed
the exchange offer on March 27, 2000.

         Liquidity and Capital Resources

         The leases for the Somerset Generating Station and the Cayuga
Generating Station require that we make fixed semiannual payments of rent on
each January 2 and July 2 during the terms of the leases commencing on January
2, 2000 in amounts calculated to be sufficient (1) to pay principal and interest
when due on the secured lease obligation notes issued by the special purpose
business trusts that own and lease to us the Somerset Generating Station and the
Cayuga Generating Station and (2) to pay the economic return of the
institutional investors that formed the special purpose business trusts. Our
minimum rent obligation under the leases was $36.5 million for 1999 and is $59.8
million for 2000, $60.5 million for 2001, $60.5 million for 2002, $60.5 million
for 2003 and a total of $1,467.4 million for the years thereafter. For purposes
of the minimum rent obligations described in the preceding sentence, we treated
the semiannual rent payments that are due on January 2 of each year as though
they would be paid in the preceding year. You can find information concerning
our minimum rental obligations that treats rent payments as obligations for the
years in which they are due in the notes to our audited financial statements
which are included in this Annual Report on Form 10-K. Through January 2, 2017
and so long as no Lease Event of Default exists, we may defer payment of rent
obligations under each lease in excess of the amount required to pay principal
and interest on the secured lease obligation notes until after the final
scheduled payment date of the secured lease obligation notes. In addition, we
are required to maintain a rent reserve account equal to the maximum semiannual
payment with respect to the sum of basic rent (other than deferrable basic rent)
and fixed charges expected to become due on any one basic rent payment date in
the immediately succeeding three-year period. The amount of the rent reserve
account required currently is $29 million. We will also be obligated to make
payments under the coal hauling agreement with


                                       29
<PAGE>


Somerset Railroad in an amount sufficient, when added to funds available from
other sources, to enable Somerset Railroad to pay, when due, all of its
operating expenses and other expenses, including interest on and principal of
outstanding indebtedness. Somerset Railroad currently has a 364-day term loan of
up to $26 million from an affiliate of CIBC World Markets. See "Business--Our
Plan and Strategy--Fuel Supply Strategy." As a result of these obligations, we
must dedicate a substantial portion of our cash flow from operations to payments
of rent under the leases, payment of the principal amount outstanding from time
to time under our working capital credit facility with Credit Suisse First
Boston and interest on this principal amount and payments under the coal hauling
agreement with Somerset Railroad.

         We incurred approximately $64.2 million in capital expenditures with
regard to our assets through December 31, 1999, including approximately $31
million that we paid to AES NY, L.L.C. on May 14, 1999 for work in progress on a
selective catalytic reduction system at the Somerset Generating Station and
including expenditures made in connection with the construction of that
selective catalytic reduction system that we capitalized. We will make capital
expenditures thereafter according to the life extension program to be
implemented at our electricity generating stations. The average capital
expenditures to be made under the program are $11.9 million per year. We have
budgeted capital expenditures totaling $8.5 million for 2000, $17.4 million for
2001, $10.4 million for 2002, $4.4 million for 2003, $3.5 million for 2004 and a
total of $335 million for the remaining years through 2032. These amounts
include approximately $11 million to install a selective catalytic reduction
system to reduce NOX emissions at the Cayuga Generating Station during a
scheduled outage in 2001, although we are also considering other compliance
strategies, such as the addition of a selective non-catalytic reduction system.
In addition to capital requirements associated with the ownership and operation
of our electricity generating stations, we will have significant fixed charge
obligations in the future, principally with respect to the leases.

         Compliance with environmental standards will continue to be reflected
in our capital expenditures and operating costs. Based on the current status of
regulatory requirements and, other than the expenditures for a selective
catalytic reduction system at the Somerset Generating Station, including the
construction of new landfill space to manage ash from selective catalytic
reduction system operations, and possible expenditures for a selective catalytic
reduction system at the Cayuga Generating Station, we do not anticipate that any
capital expenditures or operating expenses associated with our compliance with
current laws and regulations will have a material effect on our results of
operations or our financial condition. See "Business--Regulation--Environmental
Regulatory Matters."

         Our net working capital at December 31, 1999 was $47 million. No
amounts were borrowed under our working capital credit facility with Credit
Suisse First Boston at December 31, 1999. During the period from May 14, 1999 to
December 31, 1999, we made only one borrowing under our working capital credit
facility. This borrowing was from August 25, 1999 to September 13, 1999 in the
amount of $5 million and bore interest at the rate of 9.25% per annum. The
outage at the Somerset Generating Station for almost the entire period from May
14, 1999 to June 30, 1999 did not impair our ability to meet our obligations
during this period. Subsequent to this outage, our four electricity generating
stations are all available for service and are being dispatched to generate
electricity when market conditions warrant.

         Cash flow from our operations was sufficient to cover aggregate rental
payments under the leases for the Somerset Generating Station and the Cayuga
Generating Station on the first rent payment date, January 2, 2000. We believe
that cash flow from our operations will be sufficient to cover aggregate rental
payments on each rent payment date thereafter. We also believe that our cash
flow from operations, together with amounts we can borrow under our $50 million
working capital credit facility with Credit Suisse First Boston (or renewals or
refinancings), will be sufficient to cover expected capital requirements over
the terms of the leases. If we are required to make unanticipated capital
expenditures, our cash flow from operations and operating income in the period
incurred might be reduced. In the event of a shortfall between the amount of our
commitments and the foregoing sources of funds, the shortfall may be made up by
loans or equity contributions from The AES Corporation, but there can be no
assurances that The AES Corporation would decide to provide a loan or equity
contribution.

         Our working capital credit facility with Credit Suisse First Boston
permits us to borrow up to $50 million for operating and maintenance expenses.
Loans under the working capital credit facility with Credit Suisse First Boston
will be available on a revolving basis, provided that the aggregate principal
amount available under the working capital credit facility will be reduced by
the outstanding principal amount under any secured borrowings permitted by the
terms of the working capital credit facility. During each 12-month period,
borrowings under the working capital credit facility must be repaid, and cannot
be reborrowed, during a 30-day period preceding at least one semiannual lease
rental payment date. Amounts outstanding under the working capital credit
facility also must be reduced to zero prior to any rental payment under the
leases. The working capital credit facility is secured by a pledge of our
membership interest in AEE2, L.L.C., our wholly


                                       30
<PAGE>


owned subsidiary that owns the Greenidge Generating Station and the Westover
Generating Station, and by a security interest in equipment and personal
property of AEE2, L.L.C.

         Our future ability to obtain additional debt financing for working
capital, capital expenditures or other purposes is limited by financial
covenants restricting our ability to incur debt and liens contained in the
agreements governing the leases of the Kintigh Generating Station and the
Milliken Generating Station. With certain exceptions, these agreements limit us
to a maximum of $100,000,000 of indebtedness, including no more than $25,000,000
of indebtedness for purposes other than to provide working capital.

         Our ability to make distributions to the partners of our company is
restricted by the terms of the agreements governing the leases for the Somerset
Generating Station and the Cayuga Generating Station. We may make distributions
only on or within five days after a semiannual rent payment date and only if all
rent on the leases has been paid, the reserve accounts for lease payments that
we are required to maintain are fully funded and other conditions are satisfied.

         Year 2000 Compliance

         We have experienced no adverse effects from the expected year 2000
issue, which is the failure of computers to recognize the year 2000 and later
years. We do not anticipate any adverse effects from the year 2000 issue.

         Under the Asset Purchase Agreement with NYSEG, NYSEG expressly
disclaimed liability for losses stemming from the failure of computers to
recognize dates in the year 2000 and later years. NYSEG developed and
implemented a year 2000 compliance program for all of its facilities pursuant to
which NYSEG assessed the potential impact of this issue on its operations. NYSEG
evaluated (a) the vulnerability of its facility operations for the supply of
power, (b) its business software and hardware including those systems developed
internally and those purchased from third parties and (c) other systems and
products used internally that were purchased from third parties. The plan
covered the evaluation of imbedded systems, control systems and computer systems
at the component level for potential year 2000 impact. NYSEG agreed to deliver
to us all materials relating to NYSEG's year 2000 compliance efforts. In
addition, we met with the NYSEG personnel responsible for NYSEG's year 2000
compliance efforts and we are familiar with all aspects of these efforts.

         As part of its assessment, NYSEG evaluated all date sensitive systems
necessary to generate energy at each of our electricity generating stations and
tested these systems during scheduled maintenance outages. At the Somerset
Generating Station and the Cayuga Generating Station, these tests included
rolling the date forward to December 31, 1999. To the extent that compliance
problems existed at any of our electricity generating stations, a replacement
option was put into place. NYSEG spent approximately $80,000 in the aggregate in
1998 for testing and upgrades, $70,000 of which was spent at the Somerset
Generating Station and the Cayuga Generating Station. During 1999, the combined
expenditures by us and NYSEG were approximately $300,000 for testing and
upgrades at the Somerset Generating Station and the Cayuga Generating Station.
New business systems software and hardware, including software for accounting,
inventory management, work management and payroll, which are year 2000
compliant, were put in place at each of our electricity generating stations. In
addition, the continuous emission monitoring systems at each of our electricity
generating stations were upgraded during 1999 at an aggregate cost of $240,000.

         In addition, NYSEG and we surveyed all of the third parties with which
we deal to determine the extent of these third parties' year 2000 compliance
efforts and requested compliance certificates from all equipment vendors. NYSEG
and we received certifications that the third parties with which we conduct
business were year 2000 compliant.

         Forward Looking Statements

         Certain statements contained in this Annual Report on Form 10-K 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 "believes," "expects," "may," "intends,"
"will," "should" or "anticipates" or the negative forms or other variations of
these terms or 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. The most significant
risks, uncertainties and other factors are discussed under the heading
"Business--General Development of Business" in this Annual Report on Form 10-K,
and you are urged to consider carefully such factors.


                                       31
<PAGE>


Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

                  Not applicable.


Item 8.  Financial Statements and Supplementary Data

                  The following financial statements are attached to this Annual
Report on Form 10-K following the signature page:

AES EASTERN ENERGY, L.P.

Independent Auditors' Report

Financial Statements:

         Consolidated Balance Sheet as of December 31, 1999
         Consolidated Statement of Income for the period from May 14, 1999
             (inception) to December 31, 1999
         Consolidated Statement of Changes in Partners' Capital for the period
             from May 14, 1999 (inception) to December 31, 1999
         Consolidated Statement of Cash Flows for the period from May 14, 1999
             (inception) to December 31, 1999
         Notes to Consolidated Financial Statements

AES NY, L.L.C. (General Partner of AES Eastern Energy, L.P.)*

Independent Auditors' Report

Financial Statements:

         Consolidated Balance Sheet as of December 31, 1999
         Notes to Consolidated Balance Sheet

*    The balance sheet of AES NY, L.L.C. contained in this Annual Report on Form
     10-K should be considered only in connection with its status as the general
     partner of AES Eastern Energy, L.P.


Item 9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

                  Not applicable.


                                       32
<PAGE>


                                    PART III

Item 10.  Directors and Executive Officers of Our Company

         We are a Delaware limited partnership. Under the Delaware Revised
Uniform Limited Partnership Act and our Agreement of Limited Partnership, the
general partner of our company, AES NY, L.L.C., manages our business and
affairs. Our managers are appointed by AES NY, L.L.C., as general partner of our
company. Our managers may be appointed from time to time by AES NY, L.L.C. and
hold their positions at the discretion of AES NY, L.L.C. AES NY, L.L.C. may
elect to appoint additional managers from time to time. The AES Corporation
indirectly owns all member interests in and controls AES NY, L.L.C.

         The following table sets forth certain information concerning our
management team as of March 1, 2000.

         Name                      Age      Position

         Dan Rothaupt              48       General Manager
         John Ruggirello           49       Assistant General Manager
         Richard Santoroski        35       Manager of Marketing
         Harry Lovrak              49       Somerset Plant Manager
         Mark Adams                42       Cayuga Plant Manager
         James Mulligan            51       Westover Plant Manager
         Douglas Roll              44       Greenidge Plant Manager

         Dan Rothaupt, our management team leader, is a former plant manager for
AES Thames, a coal-fired facility located in the New England power pool region.
Mr. Rothaupt has been with The AES Corporation for 10 years. In addition to AES
Thames, he has managed a number of complex operations including the startup of
The AES Corporation's business in Hawaii with its coal-fired Barbers Point
facility. Mr. Rothaupt has a proven track record of reducing costs while
organizing The AES Corporation's businesses at various locations in the United
States and has 25 years experience working in various aspects of power systems.
Mr. Rothaupt is General Manager of our company. Mr. Rothaupt has a Bachelor of
Science degree in Mechanical Engineering from the United States Coast Guard
Academy.

         John Ruggirello is a Vice President of The AES Corporation and has over
21 years of industry experience. Mr. Ruggirello also serves as a board member of
NIGEN, Ltd., a joint venture of The AES Corporation which acquired 760MW of
coal-fired generating assets from the government of Northern Ireland, including
a 45-year-old plant which had an availability of 100% in 1998. Mr. Ruggirello
heads a group within The AES Corporation responsible for project development,
construction and plant operations in much of the eastern United States and
Canada. He served as President of AES Beaver Valley from 1990 to 1996. Mr.
Ruggirello is Assistant General Manager of our Company. He has a Bachelor of
Science degree in Mechanical Engineering from the New Jersey Institute of
Technology.

         Richard Santoroski worked for NYSEG for 13 years prior to May 14, 1999
primarily in engineering positions in the system protection and control group
(relay) and in field distribution offices. Mr. Santoroski was formerly the lead
engineer in the electric resource planning group. Mr. Santoroski has extensive
experience in power marketing, including trading physical power options, swaps
and forwards, developing and marketing structured products in the New York power
pool, the New England power pool and the Pennsylvania-New Jersey-Maryland power
pool and overseeing NYSEG's trading, risk management and billing. Mr. Santoroski
is the Manager of Power Marketing of our company. Mr. Santoroski has a Bachelor
of Science degree in Electrical Engineering from Pennsylvania State University
and a Master of Science degree in Electrical Engineering and a Master of
Business Administration, both from Syracuse University.

         Harry Lovrak has over 16 years experience in design, start-up and
management of utility plants and has worked for The AES Corporation for 13
years. Mr. Lovrak was formerly the plant manager for AES Beaver Valley, a 50
year old coal-fired facility which has consistently achieved capacity factors in
excess of 90% under Mr. Lovrak's leadership. Mr. Lovrak is the plant manager of
the Somerset Generating Station. Mr. Lovrak has a Bachelor of Science degree in
Chemical Engineering from Ohio University.

         Mark Adams has worked for The AES Corporation for 10 years with
experience primarily in the area of financial accounting and reporting. He has
recently assisted in the takeover of 4,000MW of generating capacity purchased


                                       33
<PAGE>


from Southern California Edison as part of that utility's divestiture program.
Mr. Adams is the plant manager of the Cayuga Generating Station. Mr. Adams holds
a Bachelor of Science degree in Accounting and Business Administration from
Northeastern State University.

         James Mulligan has over 25 years experience in the power generation
business including design and management of utility plants. Mr. Mulligan was
formerly employed by NYSEG as the plant manager at the Cayuga Generating
Station. Prior to that, he was responsible for NYSEG's four central area plants,
which achieved the lowest production costs and highest availabilities in their
operating history during his tenure. Mr. Mulligan is the plant manager of the
Westover Generating Station. Mr. Mulligan has a Bachelor of Science degree in
Mechanical Engineering from the New York Institute of Technology.

         Douglas J. Roll has over 17 years experience in the power generation
business in areas of plant management, engineering, design, construction and
start-up of fossil fuel-fired power plants. Mr. Roll was formerly the Station
Manager at NYSEG's Greenidge Station where he directed the efforts of the
station's staff to the lowest production cost and heat rate and highest
reliability and availability in 25 years. Prior to that, Mr. Roll was the
Manager of Mechanical Engineering in NYSEG's Generation Department, responsible
for directing the engineering, design, construction and start-up of large scale
capital projects at NYSEG's coal fired power plants. Mr. Roll is the Plant
Manager of the Greenidge Generating Station. Mr. Roll holds a Bachelor of
Science degree in Mechanical Engineering from Cornell University and a Bachelor
of Arts degree in Biology from Queens College of the City University of New
York. Mr. Roll is a registered Professional Engineer in the State of New York.

         Management of AES NY, L.L.C., the General Partner of Our Company

         AES NY, L.L.C., the general partner of our company, is a Delaware
limited liability company managed by managers who are designated as directors.
The Board of Directors of AES NY, L.L.C. comprises two classes of directors, the
Class A Directors and the Class B Director. There are three Class A Directors,
Barry J. Sharp, John R. Ruggirello and Dan Rothaupt, each elected by the members
of the limited liability company. The business and affairs of AES NY, L.L.C. are
managed by the Class A Directors. The Class B Director's only participation in
the management of AES NY, L.L.C. is in matters of bankruptcy or related matters.
Mr. Rothaupt is also the President of AES NY, L.L.C.


Item 11.  Executive Compensation

                  Not Applicable.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

                  Not Applicable.

Item 13.  Certain Relationships and Related Transactions

                  Not Applicable.


                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  Financial Statements, Financial Statement Schedules and Exhibits.

     (1) The following financial statements are attached to this Annual Report
         on Form 10-K following the signature page:

      AES EASTERN ENERGY, L.P.

      Independent Auditors' Report


                                       34
<PAGE>


      Financial Statements:

              Consolidated Balance Sheet as of December 31, 1999
              Consolidated Statement of Income for the period from May 14, 1999
                  (inception) to December 31, 1999
              Consolidated Statement of Changes in Partners' Capital for the
                  period from May 14, 1999 (inception) to December 31, 1999
              Consolidated Statement of Cash Flows for the period from May 14,
                  1999 (inception) to December 31, 1999
              Notes to Consolidated Financial Statements

      AES NY, L.L.C. (General Partner of AES Eastern Energy, L.P.)*

      Independent Auditors' Report

      Financial Statements:

              Consolidated Balance Sheet as of December 31, 1999
              Notes to Consolidated Balance Sheet

      *   The balance sheet of AES NY, L.L.C. contained in this Annual Report on
          Form 10-K should be considered only in connection with its status as
          the general partner of AES Eastern Energy, L.P.

     (2) Financial Statement Schedules

              Schedules are omitted as the information is either not applicable,
              not required or has been furnished in the financial statements or
              notes thereto included in this Annual Report on Form 10-K.

     (3) Exhibits

         Exhibit No.                         Description
         ----------                          -----------

         3.1                   Certificate of Limited Partnership of AES Eastern
                               Energy, L.P.*

         3.2                   Agreement of Limited Partnership of AES Eastern
                               Energy, L.P., dated as of May 4, 1999*

         4.1                   Form of 9.0% Series 1999-A Pass Through
                               Certificate*

         4.2                   Form of 9.67% Series 1999-B Pass Through
                               Certificate*

         4.3a                  Pass Through Trust Agreement A, dated as of May
                               1, 1999, between AES Eastern Energy, L.P. and
                               Bankers Trust Company, as Pass Through Trustee,
                               made with respect to the formation of the Pass
                               Through Trust, Series 1999-A and the issuance of
                               9.0% Pass Through Certificates, Series 1999-A*

         4.3b                  Schedule identifying substantially identical
                               agreement to Pass Through Trust Agreement
                               constituting Exhibit 4.3a hereto*

         4.4a                  Participation Agreement (Kintigh A-1), among AES
                               Eastern Energy, L.P., as Lessee, Kintigh Facility
                               Trust A-1, as Owner Trust, DCC Project Finance
                               Fourteen, Inc., as Owner Participant, Bankers
                               Trust Company, as Indenture Trustee, and Bankers
                               Trust Company, as Pass Through Trustee, dated as
                               of May 1, 1999*

         4.4b                  Schedule identifying substantially identical
                               agreement to Participation Agreement
                               constituting Exhibit 4.4a hereto*


                                       35
<PAGE>


         Exhibit No.                         Description
         ----------                          -----------

         4.5a                  Participation Agreement (Milliken A-1), among AES
                               Eastern Energy, L.P., as Lessee, Milliken
                               Facility Trust A-1, as Owner Trust, DCC Project
                               Finance Fourteen, Inc., as Owner Participant,
                               Bankers Trust Company, as Indenture Trustee, and
                               Bankers Trust Company, as Pass Through Trustee,
                               dated as of May 1, 1999*

         4.5b                  Schedule identifying substantially identical
                               agreement to Participation Agreement constituting
                               Exhibit 4.5a hereto*

         4.6a                  Facility Lease Agreement (Kintigh A-1), between
                               Kintigh Facility Trust A-1, as Lessor, and AES
                               Eastern Energy, L.P., as Lessee, dated as of May
                               1, 1999*

         4.6b                  Schedule identifying substantially identical
                               agreements to Facility Lease Agreement
                               constituting Exhibit 4.6a hereto*

         4.7a                  Facility Lease Agreement (Milliken A-1), between
                               Milliken Facility Trust A-1, as Lessor, and AES
                               Eastern Energy, L.P., as Lessee, dated as of May
                               1, 1999*

         4.7b                  Schedule identifying substantially identical
                               agreements to Facility Lease Agreement
                               constituting Exhibit 4.7a hereto*

         4.8a                  Indenture of Trust and Security Agreement
                               (Kintigh A-1), between Kintigh Facility Trust
                               A-1, as Owner Trust, and Bankers Trust Company,
                               as Indenture Trustee, dated as of May 1, 1999*

         4.8b                  Schedule identifying substantially identical
                               agreements to Indenture of Trust and Security
                               Agreement constituting Exhibit 4.8a hereto*

         4.9a                  Indenture of Trust and Security Agreement
                               (Milliken A-1), between Milliken Facility Trust
                               A-1, as Owner Trust, and Bankers Trust Company,
                               as Indenture Trustee, dated as of May 1, 1999*

         4.9b                  Schedule identifying substantially identical
                               agreements to Indenture of Trust and Security
                               Agreement constituting Exhibit 4.9a hereto*

         4.10                  Secured Revolving O&M Costs Facility, among AES
                               Eastern Energy, L.P., the Banks named therein and
                               Credit Suisse First Boston Corp., dated as of May
                               14, 1999*

         4.11                  Registration Rights Agreement, between AES
                               Eastern Energy, L.P., and Morgan Stanley & Co.
                               Inc., Credit Suisse First Boston Corp. and CIBC
                               World Markets Corp., dated as of May 11, 1999*

         4.12                  Security Agreement, between AEE2, L.L.C. and
                               Credit Suisse First Boston, dated as of May 14,
                               1999*

         4.13                  LLC Membership Interest Pledge Agreement, between
                               AES Eastern Energy, L.P. and Credit Suisse First
                               Boston, dated as of May 14, 1999*


                                       36
<PAGE>


         Exhibit No.                         Description
         ----------                          -----------

         10.1                  Asset Purchase Agreement, among NGE Generation,
                               Inc., New York State Electric & Gas Corporation
                               ("NYSEG"), and AES NY, L.L.C. ("AES NY"), dated
                               as of August 3, 1998, (incorporated herein by
                               reference to exhibit 10.2 of the Annual Report on
                               Form 10-K of Energy East Corp. for the year ended
                               December 31, 1998 filed on March 29, 1999, SEC
                               file #001-14766)

         10.2a                 Milliken Operating Agreement, between AES NY and
                               NYSEG, dated as of August 3, 1998*

         10.2b                 Amendment No. 1 to the Milliken Operating
                               Agreement, dated as of May 6, 1999*

         10.3a                 Interconnection Agreement, between AES NY and
                               NYSEG, dated as of August 3, 1998*

         10.3b                 Amendment No. 1 to the Interconnection Agreement,
                               dated as of May 6, 1999*

         10.4                  Interconnection Implementation Agreement, between
                               NYSEG and AES NY, dated as of May 6, 1999*

         10.5                  Standard Bilateral Power Sales Agreement and
                               Transaction Agreement, between AES Eastern Energy
                               and NYSEG Solutions, Inc., dated as of May 14,
                               1999*

         10.6                  Scheduling and Settlement Agreement, among NYSEG,
                               AES Creative Resources, L.P., AES Eastern Energy
                               and EME Homer City Generation, dated as of March
                               18, 1999*

         10.7                  Agreement to Assign Transmission Rights and
                               Obligations, between AES NY and NYSEG, dated as
                               of August 3, 1998*

         10.8                  New York Transition Agreement, between AES NY and
                               NYSEG, dated as of August 3, 1998*

         10.9a                 Reciprocal Easement Agreement (Kintigh Station),
                               between AES NY and NYSEG, dated as of August 3,
                               1998*

         10.9b                 Reciprocal Easement Agreement (Milliken Station),
                               between AES NY and NYSEG, dated as of August 3,
                               1998*

         10.9c                 Reciprocal Easement Agreement (Greenidge
                               Station), between AES NY and NYSEG, dated as of
                               August 3, 1998*

         10.9d                 Reciprocal Easement Agreement (Goudey Station),
                               between AES NY and NYSEG, dated as of August 3,
                               1998*

         10.10                 Coal Sales Agreement, among NYSEG, Consolidation
                               Coal Company, CONSOL Pennsylvania Coal Company,
                               Nineveh Coal Company, Greenon Coal Company,
                               McElroy Coal Company and Quarto Mining Company,
                               dated as of November 1, 1983*

         10.11a                Coal Supply Agreement, between NYSEG and United
                               Eastern Coal Sales Corporation, dated as of
                               January 12, 1998*

         10.11b                Amendment No. 1 to Coal Sales Agreement, dated as
                               of February 20, 1998*


                                       37
<PAGE>


         Exhibit No.                         Description
         ----------                          -----------


         10.12                 Coal Supply Agreement, between NYSEG and Eastern
                               Associated Coal Corporation, dated as of July 1,
                               1994*

         10.13                 Coal Hauling Agreement, among Somerset Railroad
                               Corporation, AES NY3, L.L.C., and AES Eastern
                               Energy L.P., dated as of May 6, 1999*

         10.14                 Scheduling and Settlement Agreement, among CSX
                               Transportation, Inc., Norfolk Southern
                               Corporation, Norfolk Southern Railway Company and
                               NYSEG, dated as of February 20, 1998*

         10.15                 Capacity, Energy and Marketing Agreement, between
                               Merchant Energy Group of the Americas, Inc. and
                               AES Eastern Energy, dated as of April 8, 1999.
                               (The Registrant has requested confidential
                               treatment for certain information identified in
                               this exhibit.)*

         10.16                 Kintigh Turbine Agreement, among NGE, NYSEG and
                               AES Eastern Energy L.P. dated as of April 13,
                               1999*

         10.17                 Omnibus Agreement, between NYSEG and AES NY,
                               dated as of May 7, 1999*

         10.18                 Assignment and Assumption Agreement, among NGE,
                               NYSEG and AES NY, dated as of May 14, 1999*

         10.19                 Deposit and Disbursement Agreement among AEE,
                               Credit Suisse First Boston, as Working Capital
                               Provider, and Bankers Trust Company, as
                               Depositary Agent, et al., dated May 1, 1999*

         12.1                  Statement regarding ratio of earnings to fixed
                               charges

         21.1                  Subsidiaries Schedule*

         24.1                  Power of Attorney

         27.1                  Financial Data Schedule

------------------------------

*        Incorporated herein by reference to similarly numbered exhibit to the
         Registration Statement on Form S-4 of AES Eastern Energy, L.P. (Reg.
         No. 333-89725), filed with the Securities and Exchange Commission on
         October 26, 1999.

(b)  Reports on Form 8-K.

         No reports on Forms 8-K have been filed during the last quarter of our
fiscal year ended December 31, 1999.


                                       38
<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, AES Eastern Energy, L.P. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:  March 30, 2000

                                   AES EASTERN ENERGY, L.P.
                                         By: AES NY, L.L.C., as General Partner



                                   By: /s/ Dan Rothaupt
                                       -------------------------
                                       Dan Rothaupt
                                       President

         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons in the
capacities and on the dates indicated.

       Signature                       Title                          Date
---------------------   -----------------------                 ---------------


  /s/ Dan Rothaupt      President (chief executive officer)      March 30, 2000
---------------------   and Class A Director of AES NY, L.L.C.
Dan Rothaupt


  /s/ John Ruggirello   Vice President and Class A Director of   March 30, 2000
---------------------   AES NY, L.L.C.
John Ruggirello


  /s/ Barry Sharp       Chief Financial Officer (and chief       March 30, 2000
---------------------   accounting officer) and Class A Director
Barry Sharp             of AES NY, L.L.C.



Supplemental Information to Be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act

         We did not, and do not intend to, send to security holders an annual
report covering our last fiscal year (other than this Annual Report on Form
10-K) or a proxy statement with respect to an annual or other meeting of
security holders.


                                       39
<PAGE>


                          Index to Financial Statements

                                                                            Page
AES EASTERN ENERGY, L.P.

Independent Auditors' Report........................................         F-2

Financial Statements:

   Consolidated Balance Sheet.......................................         F-3

   Consolidated Statement of Income.................................         F-4

   Consolidated Statement of Changes in Partners' Capital...........         F-5

   Consolidated Statement of Cash Flows.............................         F-6

   Notes to Consolidated Financial Statements.......................         F-7

AES NY, L.L.C. (General Partner of AES Eastern Energy, L.P.)*

Independent Auditors' Report........................................        F-17

Financial Statements:

   Consolidated Balance Sheet........................................       F-18

   Notes to Consolidated Balance Sheet...............................       F-19



*The balance sheet of AES NY, L.L.C. contained in this Form 10-K should be
considered only in connection with its status as the general partner of AES
Eastern Energy, L.P. The pass through trust certificates do not represent an
interest in or an obligation of AES NY, L.L.C.


                                      F-1
<PAGE>


INDEPENDENT AUDITORS' REPORT


To the Partners of
 AES Eastern Energy, L.P.

We have audited the accompanying consolidated balance sheet of AES Eastern
Energy, L.P. (an indirect wholly owned subsidiary of The AES Corporation) and
subsidiaries (the Partnership) as of December 31, 1999, and the related
consolidated statements of income, changes in partners' capital, and cash flows
for the period from May 14, 1999 (inception) through December 31, 1999. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
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
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AES Eastern Energy, L.P., and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the period from May 14, 1999 (inception) through December
31, 1999, in conformity with generally accepted accounting principles.

/s/Deloitte & Touche LLP



McLean, Virginia
March 17, 2000


                                      F-2
<PAGE>


AES EASTERN ENERGY, L.P.

CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(Amounts in Thousands)
-------------------------------------------------------------------------------


ASSETS
------

CURRENT ASSETS:
     Restricted cash:
        Operating - cash and cash equivalents                    $      4,200
        Revenue account                                                48,437
     Accounts receivable - trade                                       22,481
     Accounts receivable - affiliates                                     271
     Accounts receivable - other                                          322
     Inventory                                                         27,989
     Prepaid expenses                                                   6,189
                                                                 -------------

          Total current assets                                        109,889
                                                                 -------------
PROPERTY, PLANT, EQUIPMENT, AND
     RELATED ASSETS:
     Land                                                               6,850
     Electric generation assets (net of
        accumulated depreciation of $17,389)                          986,552
                                                                 -------------

          Total property, plant, equipment and related assets         993,402
                                                                 -------------
OTHER ASSETS:
     Rent reserve account                                              29,543
                                                                 -------------

TOTAL ASSETS                                                     $  1,132,834
                                                                 =============

LIABILITIES AND PARTNERS' CAPITAL
---------------------------------

CURRENT LIABILITIES:
     Accounts payable                                            $        508
     Accrued interest expense                                          38,460
     Due to The AES Corporation                                         3,250
     Other accrued expenses                                            12,995
     Other liabilities                                                  7,837
                                                                 -------------

          Total current liabilities                                    63,050
                                                                 -------------

LONG-TERM LIABILITIES:
     Lease financing - long term                                      650,000
     Environmental remediation                                         11,080
     Defined benefit plan obligation                                   23,880
     Other liabilities                                                  6,603
                                                                 -------------

          Total long-term liabilities                                 691,563
                                                                 -------------

TOTAL LIABILITIES                                                     754,613

COMMITMENTS AND CONTINGENCIES (Note 7)

PARTNERS' CAPITAL                                                     378,221
                                                                 -------------

TOTAL LIABILITIES AND PARTNERS' CAPITAL                          $  1,132,834
                                                                 =============


                                      F-3
<PAGE>


AES EASTERN ENERGY, L.P.

CONSOLIDATED STATEMENT OF INCOME
PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
(Amounts in Thousands)
--------------------------------------------------------------------------------

OPERATING REVENUES:
     Energy                                                           $162,854
     Capacity                                                           17,927
     Other                                                               3,787
                                                                      ---------

          Total revenues                                               184,568
                                                                      ---------
OPERATING EXPENSES:
     Fuel                                                               70,718
     Depreciation and amortization                                      17,389
     Operating and maintenance                                           7,639
     General and administrative                                         31,784
                                                                      ---------

          Total operating expenses                                     127,530
                                                                      ---------

OPERATING INCOME                                                        57,038
                                                                      ---------

OTHER INCOME (EXPENSE):
     Interest expense                                                  (33,719)
     Interest income                                                     1,096
                                                                      ---------

          Total other income (expense)                                 (32,623)
                                                                      ---------

NET INCOME                                                            $ 24,415
                                                                      =========


See notes to consolidated financial statements.


                                      F-4
<PAGE>


AES EASTERN ENERGY, L.P.

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
(Amounts in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                 General        Limited
                                                                 Partner        Partner        Total
<S>                                                            <C>             <C>           <C>
BALANCE, MAY 14, 1999                                           $   -           $   -         $   -

     Capital contribution (net of $1.1 million to be
        returned to The AES Corporation, see Note 8)              3,538          350,268       353,806

     Net income for the period ended December 31, 1999              244           24,171        24,415
                                                                ---------       ---------     ---------

BALANCE, DECEMBER 31, 1999                                      $ 3,782         $374,439      $378,221
                                                                =========       =========     =========
</TABLE>


See notes to consolidated financial statements.


                                      F-5
<PAGE>


AES EASTERN ENERGY, L.P.

CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
(Amounts in Thousands)
--------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net Income                                                      $  24,415
     Adjustments to reconcile net income to net cash
       used in operating activities:
       Depreciation and amortization                                    17,389
       Accrued interest expense                                         33,719
       Interest income accrued in rent reserve account                    (870)
       Net defined benefit plan cost                                     1,479
     Changes in current operating assets and liabilities:
       Accounts receivable - trade                                     (22,803)
       Accounts receivable - affiliates                                   (271)
       Inventory                                                        (5,055)
       Prepaid expenses                                                 (6,189)
       Accounts payable                                                    508
       Other liabilities                                                 2,687
       Other accrued expenses                                           12,995
                                                                      ---------

          Net cash provided by operating activities                     58,004
                                                                      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisition of assets at inception date                          (267,424)
     Payments for capital additions                                    (64,223)
     Increase in restricted cash                                       (52,637)
                                                                      ---------

          Net cash used in investing activities                       (384,284)
                                                                      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Cash capital contributions                                        354,953
     Payments to rent reserve account                                  (28,673)
                                                                      ---------

          Net cash provided by financing activities                    326,280
                                                                      ---------

INCREASE IN CASH AND CASH EQUIVALENTS                                      -

CASH AND CASH EQUIVALENTS, MAY 14, 1999                                    -
                                                                      ---------

CASH AND CASH EQUIVALENTS, DECEMBER 31, 1999                          $    -
                                                                      =========



On May 14, 1999, the Partnership acquired electric generation assets valued at
$650 million under leases accounted for as a financing.


                                      F-6
<PAGE>


AES EASTERN ENERGY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
================================================================================


1.    GENERAL

      AES Eastern Energy, L.P. (the Partnership), a Delaware limited
      partnership, was formed on December 2, 1998. The Partnership's wholly
      owned subsidiaries are AES Somerset, L.L.C., AES Cayuga, L.L.C., and AEE2,
      L.L.C., (which wholly owns AES Westover, L.L.C. and AES Greenidge,
      L.L.C.). The Partnership began operations on May 14, 1999 (see Note 3).
      Prior to that date, the Partnership had no operations. The Partnership is
      an indirect wholly owned subsidiary of The AES Corporation. The
      Partnership has adopted December 31 as its fiscal year-end.

      The Partnership was established for the purpose of owning and operating
      four coal-fired electric generating stations (the Plants) with a total
      combined capacity of 1,268 MW. The partners of the Partnership are
      comprised of AES NY, L.L.C. (the General Partner) and AES NY2, L.L.C. (the
      Limited Partner) both of which are indirect wholly owned subsidiaries of
      The AES Corporation (AES). The Plants are owned or leased by the
      Partnership (see Note 3) and are operated by the Partnership's wholly
      owned subsidiaries in the State of New York, pursuant to operation and
      maintenance agreements with the Partnership.

      The Plants sell generated electricity, as well as installed capacity and
      ancilliary services, directly into the New York Independent System
      Operator (ISO) system, Pennsylvania, New Jersey, Maryland Power Pool
      (PJM), and New England Power Pool (NEPOOL). For Federal regulatory
      purposes, the Partnership is an exempt wholesale generator (EWG). As an
      EWG, the Partnership cannot make retail sales of electricity and can only
      make wholesale sales of electricity, installed capacity, and ancillary
      services into wholesale power markets.

      The Partnership has entered into a two-year agreement for energy marketing
      services with Merchant Energy Group of the Americas, Inc. (MEGA), an
      Annapolis, Maryland-based subsidiary of Gener S.A., a Chilean independent
      power producer. MEGA is responsible for marketing the Partnership's
      electric energy, installed capacity, and ancillary services.

2.    SIGNIFICANT ACCOUNTING POLICIES

      Principles of Consolidation - The consolidated financial statements
      include the accounts of the Partnership, AES Somerset, L.L.C., AES Cayuga,
      L.L.C., and AEE2, L.L.C. (which includes its subsidiaries, AES Westover,
      L.L.C., and AES Greenidge, L.L.C.). All material intercompany transactions
      have been eliminated.

      Cash and Cash Equivalents - The Partnership considers cash on hand,
      deposits in banks, and short-term marketable securities with original
      maturities of three months or less in operating accounts to be cash and
      cash equivalents.

      Restricted Cash - Under the terms of the deposit and disbursement
      agreement entered into in connection with the lease of two plants (see
      Note 6), all revenues of the Partnership and its subsidiaries are
      deposited into a revenue account administered by the depositary agent. On
      request of the Partnership and in accordance with the terms of the deposit
      and disbursement agreement, funds are transferred from the


                                      F-7
<PAGE>


      revenue account to other operating accounts administered by the depositary
      agent for payment of operating and maintenance costs, lease obligations,
      debt service, reserve requirements, and distributions. Payment of
      operating and maintenance costs (other than actual fuel costs) in excess
      of 125% of the annual operating budget requires confirmation from an
      independent engineer that such payment is based on reasonable assumptions.

      Inventory - Inventory, valued at fair market value on the date of
      acquisition (see Note 3), and subsequently valued at the lower of cost
      (average cost basis) or market, consists of coal and other raw materials
      used in generating electricity, and spare parts, materials, and supplies.

      Inventory, as of December 31, 1999, consisted of the following (in
      thousands):

        Coal and other raw materials                                  $  9,953
        Spare parts, materials, and supplies                            18,036
                                                                      ---------

        Total                                                         $ 27,989
                                                                      =========

      Property, Plant, Equipment, and Related Assets - Electric generation
      assets that existed at the date of acquisition (see Note 3) are recorded
      at fair market value. The Somerset (formerly known as Kintigh) and Cayuga
      (formerly known as Milliken) Plants, which represent $650 million of the
      electric generation assets, are subject to a leasing arrangement accounted
      for as a financing (see Note 6). Additions or improvements thereafter are
      recorded at cost. Depreciation is computed using the straight-line method
      over the 34-year and 28-year lease terms for the Somerset and Cayuga
      Plants, respectively, and over the estimated useful lives for the other
      fixed assets, which range from 7 to 35 years. Maintenance and repairs are
      charged to expense as incurred.

      Electric generation assets as of December 31, 1999, consisted of the
      following (in thousands):

        Electric generation tangible assets                           $762,890
        Other intangible assets                                        241,051
        Accumulated depreciation and amortization                      (17,389)
                                                                      ---------

        Total                                                         $986,552
                                                                      =========

      Other intangible assets represent assets that were identified and valued
      in an independent appraisal and that are directly related to the physical
      assets of the Plants. These include trading benefits derived from the
      ability of the Partnership to enter new deregulated markets through sale
      of the output of the Plants, potential revenues from ancillary services,
      and mitigation of environmental risk due to the advanced emissions control
      equipment that has already been installed at the principal Plants. Trading
      benefits provide both the Plants and the Partnership the ability to
      arbitrage electricity generation and installed capacity in order to
      capture the most lucrative prices in available markets. Ancillary services
      include voltage support, spinning reserves, and other activities that
      enhance the stability and reliability of the transmission system. These
      services will be purchased by the organizations that manage power systems
      rather than wholesale electricity customers. Mitigation of environmental
      risk reflects the Partnership's ability, created by pollution control
      devices, to effectively use lower cost and lower grade coal to provide the
      same electricity output as its competitors. Amortization is computed on
      the same basis as the related assets (28 to 34 years).


                                      F-8
<PAGE>


      Rent Reserve Account - As part of the Partnership's lease obligation (see
      Note 6), the Partnership is required to maintain a rent reserve account
      equal to the maximum semiannual payment with respect to the sum of basic
      rent (other than deferrable payments) and fixed charges expected to become
      due on any one basic rent payment date in the immediately succeeding
      three-year period. As of December 31, 1999, the Partnership had fulfilled
      this obligation by entering into a Payment Undertaking Agreement, dated as
      of May 1, 1999, among the Partnership, each Owner Trust (see Note 3) and
      Morgan Guaranty Trust Company of New York (the Payment Undertaking
      Agreement). On May 14, 1999, the Partnership deposited with Morgan
      Guaranty Trust Company of New York approximately $28.7 million pursuant to
      the Payment Undertaking Agreement. The accreted value of the Payment
      Undertaking Agreement at any time includes interest earned thereunder at
      an interest rate of 4.79% per annum. Interest earnings as of December 31,
      1999, were approximately $870,000 and are included in the rent reserve
      account balance. At December 31, 1999, the accreted value of the Payment
      Undertaking Agreement exceeded the required balance of the rent reserve
      account. This amount is being accounted for as a restricted cash balance
      and is included within the rent reserve account on the accompanying
      balance sheet, as it can only be utilized to satisfy lease obligations.

      In the future, the Partnership may fulfill its obligation to maintain the
      required balance of the rent reserve account either by deposits into the
      rent reserve account or by making amounts available under the Payment
      Undertaking Agreement, such that the aggregate amount of such deposits in
      the rent reserve account and amounts available to be paid under the
      Payment Undertaking Agreement are equal to the required balance of the
      rent reserve account.

      Line of Credit Agreement - The Partnership has established a three-year
      revolving working capital credit facility of up to $50 million for the
      purpose of making funds available to pay for certain operating and
      maintenance costs. Amounts outstanding under the working capital facility
      are required to be reduced to zero for thirty days prior to any one lease
      rental payment date in each year. Interest accrues on outstanding balances
      at a base rate plus 1% or the applicable adjusted Eurodollar rate plus
      1.75%. The working capital credit facility is collateralized by a pledge
      of the Partnership's membership interest in AEE2, L.L.C. and by a security
      interest in equipment and personal property of AEE2, L.L.C. As of December
      31, 1999, no amounts were outstanding under this credit facility.

      Revenue Recognition - Revenues from the sale of electricity are recorded
      based upon output delivered and rates specified under contract terms.
      Revenues for ancillary and other services are recorded when the services
      are rendered.

      New York Transition Agreement - As the New York ISO system represents a
      deregulated environment, the ISO will attempt to ensure stability of the
      power grid in New York by requiring each entity engaged in retail sales of
      electricity to obtain installed capacity commitments from generators in an
      amount equal to the entity's forecasted peak load plus a reserve margin.
      This requirement is intended to ensure that an adequate supply of
      electricity is always available. The General Partner entered into a
      two-year transition agreement with New York State Electric & Gas
      Corporation (NYSEG) pursuant to which the Partnership will sell its
      installed capacity to NYSEG in order to permit NYSEG to comply with ISO
      standards for system stability. The transition agreement was assumed by
      the Partnership on the date of acquisition of the Plants. The Partnership
      recognizes revenue under this contract as it is earned, which is $68 per
      MW per day for installed capacity made available.

      Income Taxes - A provision for Federal and state income taxes has not been
      made in the accompanying financial statements since the Partnership does
      not pay income taxes but rather allocates its revenues and expenses to the
      individual partners. Differences between the results of operations
      reported in the financial statements and those reported on individual
      partners' income tax returns are due primarily to the


                                      F-9
<PAGE>


      use of different lease treatment, accelerated depreciation methods, and
      shorter useful lives for income tax purposes.

      Use of Estimates - The preparation of financial statements in conformity
      with generally accepted accounting principles requires the Partnership 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.

      Comprehensive Income - In 1999, the Partnership adopted Statement of
      Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
      Income, which establishes rules for the reporting of comprehensive income
      and its components. The adoption of SFAS No. 130 had no impact on the
      Partnership's financial statements as it had no items of other
      comprehensive income.

      New Accounting Pronouncements - In June 1998, the Financial Accounting
      Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
      Instruments and Hedging Activities, which established standards for the
      accounting and reporting of derivative financial instruments and hedging
      activities. The standard will be adopted by the Partnership during fiscal
      year 2001. The Partnership is currently evaluating the impact of the
      adoption of SFAS No. 133.

3.    ACQUISITION

      On May 14, 1999, the Partnership's four Plants were acquired from NYSEG
      for approximately $914 million. The Partnership acquired ownership of two
      of the Plants, Westover (formerly known as Goudy) and Greenidge. The other
      two Plants, Somerset and Cayuga, were acquired for $650 million by twelve
      unrelated third-party owner trusts (collectively, the Owner Trusts)
      organized by three unrelated institutional investors. Simultaneously, the
      Partnership entered into separate leasing agreements for the Somerset and
      Cayuga Plants with the Owner Trusts. The Partnership accounts for these
      leases as a financing (see Note 6).

      The acquisition was financed by capital contributions from the General
      Partner and the Limited Partner in an aggregate amount equal to the
      purchase price for the Plants, certain associated costs and expenses, and
      certain amounts for working capital less the net proceeds from the leasing
      transactions with respect to the Somerset and Cayuga Plants described
      above. The acquisition has been accounted for as an asset purchase.

      In connection with the acquisition, NYSEG engaged an environmental
      consulting firm to perform an environmental analysis of the potential
      required remediations for soil and ground water contamination. The
      Partnership engaged another environmental consulting firm to evaluate the
      costs estimated by NYSEG's consultants. The environmental analysis and the
      Partnership's estimate of other environmental remediation costs indicated
      that there existed a range of potential remediation costs of between $8.5
      million and $19.7 million, with a most probable liability of approximately
      $12 million. The Partnership recorded $12 million as an undiscounted
      liability under purchase accounting for the projected remediation cost. As
      of December 31, 1999, $2 million was classified as a current liability.

      Also in connection with the acquisition, the General Partner entered into
      an agreement for the construction of a selective catalytic reduction (SCR)
      facility at the Somerset Plant. The SCR facility is designed to
      significantly reduce the amount of nitrogen oxide emissions from the
      burning of coal fuel at the Somerset Plant. The Partnership acquired the
      SCR work in progress from the General Partner on May 14, 1999, for
      approximately $31 million, which was the contract price for the SCR.
      Construction of


                                      F-10
<PAGE>


      this asset began prior to the acquisition of the Plants. On the
      acquisition date, the Somerset Plant was shut down to complete
      construction and make other improvements. The outage lasted until late
      June 1999. All costs associated with the installation of the SCR,
      including construction and engineering costs, wages of people involved in
      the construction, and interest expense during the period were capitalized.
      The Somerset Plant was placed back in service on June 28, 1999.

      The Partnership receives certain payments for installed capacity under the
      New York Transition Agreement (see Note 2). Payments received while the
      Somerset Plant was out of service, of approximately $2.1 million, have
      reduced the total amount of capitalized costs. Total costs capitalized
      during construction were approximately $52 million, which included
      approximately $5.2 million in capitalized interest.

      The purchase agreement with NYSEG relating to the acquisition of the
      Plants provided for a post-closing adjustment of the purchase price to
      reflect the actual book value of inventories and a pro rata allocation of
      various expenses as of the acquisition date. As a result of this
      adjustment and to settle other contractual obligations, NYSEG returned
      approximately $1.6 million.

4.    PARTNERSHIP AGREEMENT

      The Partnership was capitalized with an initial contribution of $10 from
      the General Partner and $990 from the Limited Partner. Subsequently, the
      General Partner and the Limited Partner contributed $354 million to the
      Partnership (see Note 5).

      The General Partner is responsible for the day-to-day management of the
      Partnership and its operations and affairs, and is responsible for all
      liabilities and obligations of the Partnership. Under the terms of the
      Partnership Agreement, the Limited Partner is not liable for any
      obligations, liabilities, debts, or contracts of the Partnership and is
      only responsible to make capital contributions when required under the
      Partnership Agreement.

      All distributions, profits, and losses of the Partnership are allocated
      among the partners based on their ownership interests, currently 1% for
      the General Partner and 99% for the Limited Partner.

5.    CAPITALIZATION

      The Partnership is indirectly owned by AES New York Funding, L.L.C. (AES
      Funding), which is a special purpose financing vehicle established to
      raise a portion of the capital contributed to the Partnership through the
      General Partner and the Limited Partner. AES Funding is a direct wholly
      owned subsidiary of AES.

      On May 11, 1999, AES Funding entered into a three-year loan agreement with
      a syndicate of banks, with Morgan Guaranty Trust Company of New York as
      Agent, in the amount of $300 million. AES Funding contributed 1% of this
      amount to the General Partner and 99% of this amount to the Limited
      Partner which, in turn, made an aggregate capital contribution of $300
      million to the Partnership. AES also contributed capital in the amount of
      approximately $54 million through AES Funding, which subsequently
      contributed this amount to the General Partner and the Limited Partner
      which, in turn, made a capital contribution of approximately $54 million
      to the Partnership.

      Collateral for the loan consists of a pledge of the membership interests
      of AES New York Holdings, L.L.C., a direct wholly owned subsidiary of AES
      Funding, which is the 100% direct owner of both the General Partner and
      the Limited Partner.


                                      F-11
<PAGE>


      AES Funding is dependent upon the residual cash flows from the Partnership
      received in the form of dividends to service its debt. The loan is payable
      on May 14, 2002, and bears interest at a variable rate based on the terms
      of the loan agreement, which was 9.25% as of December 31, 1999. The
      Partnership has no obligation to repay this loan. If AES Funding were
      unable to repay this loan, one of the remedies available to the lenders
      would be to seek to sell the membership interests in AES New York
      Holdings, L.L.C., which would divest AES of control of the Partnership.

6.    LEASE FINANCING

      The Partnership's leases for the Somerset and Cayuga Plants are accounted
      for as a financing (see Note 3). Minimum lease payments and the present
      value of the lease obligation are as follows (in thousands):

                                                                      Lease
     Fiscal Years ending December 31,                                Payments

          2000                                                   $    67,462
          2001                                                        58,422
          2002                                                        62,577
          2003                                                        57,551
          2004                                                        63,450
          Thereafter                                               1,435,672
                                                                 ------------

     Total minimum lease payments                                  1,745,134

     Less imputed interest                                        (1,095,134)
                                                                 ------------

     Present value of minimum lease payments                     $   650,000
                                                                 ============


      Through January 2, 2017, and so long as no lease event of default exists,
      a portion of the rent payable under each lease may be deferred until after
      the final scheduled payment of the debt incurred by the Owner Trusts to
      acquire the Somerset and Cayuga Plants.

      The lease obligations are payable to the Owner Trusts. These obligations
      bear imputed interest at 9.252% and 9.024% for the Somerset and Cayuga
      facilities, respectively. Total assets under the leases of these two
      Plants were $650 million at December 31, 1999. These amounts are included
      in electric generation assets. The related accumulated depreciation,
      combined for both leased facilities, as of December 31, 1999, was
      approximately $11.1 million.

      The agreements governing the leases restrict the Partnership's ability to
      incur additional indebtedness, engage in other businesses, sell its
      assets, or merge with another entity. The ability of the Partnership to
      make distributions to its partners is restricted unless certain covenants,
      including the maintenance of certain coverage ratios, are met.

      In connection with the lease agreements, the Partnership is required to
      maintain an additional liquidity account. The required balance in the
      additional liquidity account was initially equal to the greater of $65
      million less the balance in the rent reserve account on May 14, 1999 (see
      Note 2) or $29 million. As of December 31, 1999, the Partnership had
      fulfilled its obligation to fund the additional liquidity account by
      establishing a letter of credit, issued by BankBoston, dated May 14, 1999,
      in the stated amount of approximately $36 million (the Additional
      Liquidity Letter of Credit). This letter of credit was


                                      F-12
<PAGE>

      established by AES for the benefit of the Partnership. However, the
      Partnership is obligated to replenish or replace this letter of credit in
      the event it is drawn upon or needs to be replaced.

      An aggregate amount in excess of $65 million is available to be drawn
      under the Payment Undertaking Agreement (see Note 2) and the Additional
      Liquidity Letter of Credit for making rental payments. In the event
      sufficient amounts to make rental payments are not available from other
      sources, a withdrawal from the additional liquidity account (which may
      include making a drawing under the Additional Liquidity Letter of Credit)
      and from the rent reserve account (which may include making a demand under
      the Payment Undertaking Agreement) may be made for rental payments.

7.    COMMITMENTS AND CONTINGENCIES

      Coal Purchases - In connection with the acquisition of the Plants, the
      Partnership has assumed from NYSEG an agreement to purchase the coal
      required by the Somerset, Cayuga, and Westover Plants. Each year, either
      party can request renegotiation of the price of one-third of the coal
      supplied pursuant to this agreement. During 2000, the coal suppliers are
      committed to sell and the Partnership is committed to purchase all three
      lots of coal and either party may request renegotiation of one lot of coal
      for the following year. If either party requested renegotiation during
      2000 but the parties failed to reach agreement, then the parties would
      have commitments with respect to only two lots in 2001. If the same thing
      happened in 2001, the parties would have commitments with respect to only
      one lot in 2002. Either party could terminate the contract in its sole
      discretion at the end of 2002. As of the acquisition date, the contract
      prices were above the market price, and the Partnership recorded a
      purchase accounting liability for approximately $15.7 million related to
      the fulfillment of its obligation to purchase coal under this agreement.
      As of December 31, 1999, the remaining liability was approximately $11.8
      million.

               Transmission Agreements - On August 3, 1998, the General Partner
      entered into an agreement for the purpose of transferring certain rights
      and obligations from NYSEG to the General Partner under an existing
      transmission agreement among Niagara Mohawk Power Corporation (NIMO), the
      New York Power Authority, NYSEG, and Rochester Gas & Electric Corporation,
      and an existing transmission agreement between NYSEG and NIMO. This
      agreement provides for the assignment of rights to transmit energy from
      the Somerset Plant and other sources to remote load areas and other
      delivery points, and was assumed by the Partnership on the date of
      acquisition of the Plants. In accordance with its plan, as of the
      acquisition date, the Partnership discontinued using this service. The
      Partnership does not intend to transmit over these lines and was required
      to pay the current fees until the effective cancellation date, November
      19, 1999. These fees were approximately $3.4 million over the six months
      ended December 31, 1999, and were recorded as a purchase accounting
      liability. Because the Partnership did not use the lines during this
      period, the Partnership received no economic benefit subsequent to the
      acquisition.

               The Partnership was informed by NIMO that the Partnership would
      be responsible for the monthly fees of $500,640 to the original
      termination date of October 1, 2004. On October 5, 1999, the Partnership
      filed a complaint against NIMO alleging that the Partnership has a right
      to non-firm transmission service upon six months prior notice without
      payment of $500,640 in monthly fees subsequent to the cancellation date of
      November 19, 1999. On March 9, 2000, a settlement was reached between the
      Partnership and NIMO, which is subject to approval by the Federal Energy
      Regulatory Commission (FERC). According to the settlement, the Partnership
      will continue to pay NIMO a fixed rate of $500,640 per month during the
      period of November 20, 1999, to October 1, 2004 and in turn, will receive
      a form of transmission service commencing on May 1, 2000, which the
      Partnership believes will provide an economic benefit over the period of
      May 1, 2000 to October 1, 2004. The Partnership shall have the right under
      a Remote Load Wheeling Agreement (RLWA) to transmit over firm transmission
      lines from the Somerset Plant. The Partnership shall have the right to
      convert up to 298 MW of its firm


                                      F-13
<PAGE>


      service to any point on NIMO's transmission system provided that the
      Partnership shall not be entitled to receive any transmission service
      between the Somerset Plant and points under the RLWA. The Partnership
      shall have the right to refile the original complaint with FERC on May 1,
      2001, provided that the Partnership notifies NIMO and NYSEG in writing of
      its intention to refile the complaint no later than February 1, 2001. At
      December 31, 1999, monthly fees due for the period from November 20, 1999
      to May 1, 2000 pursuant to the settlement, aggregating approximately $2.8
      million, have been recorded as a liability and expense, because the
      Partnership receives no economic benefits associated with these payments
      during this period.

      Environmental - The Partnership has recorded a liability for environmental
      remediation associated with the acquisition of the Plants (see Note 3). On
      an ongoing basis, the Partnership monitors its compliance with
      environmental laws. Because of the uncertainties associated with
      environmental compliance and remediation activities, future costs of
      compliance or remediation could be higher or lower than the amount
      currently accrued.

      On October 14, 1999, the Partnership received an information request
      letter from the New York Attorney General, which seeks detailed operating
      and maintenance history for the Westover and Greenidge Plants. On January
      13, 2000, the Partnership received a subpoena from New York State
      Department of Environmental Conservation seeking similar operating and
      maintenance history from the Plants. This information is being sought in
      connection with the Attorney General's and the Department of Environmental
      Conservation's investigations of several electricity generating stations
      in New York that are suspected of undertaking modifications in the past
      without undergoing an air permitting review. If the Attorney General or
      the Department of Environmental Conservation does file an enforcement
      action against the Somerset, Cayuga, Westover, or Greenidge Plants, then
      penalties may be imposed and further emission reductions might be
      necessary at these Plants. The Partnership is unable to estimate the
      impact, if any, of these investigations on its financial condition or
      results of future operations.

      Nitrogen Oxide and Sulfur Dioxide Emission Allowances - The Plants emit
      nitrogen oxide (NOx) and sulfur dioxide (SO2) as a result of burning coal
      to produce electricity. The Plants have been allocated allowances by the
      New York Department of Environmental Conservation to emit NOx during the
      ozone season, which runs from May 1 to September 30. Each NOx allowance
      authorizes the emission of one ton of NOx during the ozone season. The
      Plants are also subject to SO2 emission allowance requirements imposed by
      the Federal Environmental Protection Agency. Each SO2 allowance authorizes
      the emission of one ton of SO2 during the calendar year. Two of the
      Plants, Cayuga and Greenidge, are currently subject to SO2 allowance
      requirements, and effective January 1, 2000, all of the Plants are
      required to hold sufficient allowances to emit SO2. Both NOx and SO2
      allowances may be bought, sold, or traded. If NOx and/or SO2 emissions
      exceed the allowance amounts allocated to the Plants, then the Partnership
      may need to purchase additional allowances on the open market or otherwise
      reduce its production of electricity to stay within the allocated amounts.

8.    RELATED PARTY TRANSACTIONS

      The Partnership has entered into a contract with Somerset Railroad
      Corporation (SRC), a wholly owned subsidiary of AES NY3, L.L.C., which is
      an indirect wholly owned subsidiary of AES, pursuant to which SRC will
      haul coal and limestone to the Somerset Plant and make its rail cars
      available to transport coal to the Cayuga Plant. The Partnership will pay
      amounts sufficient to enable SRC to pay all of its operating and other
      expenses, including all out-of-pocket expenses, taxes, interest on and
      principal of SRC's outstanding indebtedness, and all capital expenditures
      necessary to permit SRC to continue to provide rail service to the
      Somerset and Cayuga Plants. The principal on SRC's outstanding
      indebtedness is approximately $26 million as of December 31, 1999, and is
      due on May 5, 2000. This term loan bears interest at a rate per annum
      equal to LIBOR plus 1.35% or a base rate plus 1.25%. SRC


                                      F-14
<PAGE>


      intends to refinance this indebtedness prior to the due date. As of
      December 31, 1999, approximately $1.2 million has been recorded by the
      Partnership as operating expenses and other accrued liabilities under this
      agreement.

      Prior to June 30, 1999, AES paid approximately $3.2 million in costs
      related to the acquisition of the NYSEG plants, which are to be reimbursed
      by the Partnership. Of the $3.2 million, approximately $1.1 million was
      for internal costs incurred by AES, and was treated as a reduction of
      contributed capital.

9.    BENEFIT PLANS

      Effective May 14, 1999, the Partnership adopted The Retirement Plan for
      Employees of AES NY, L.L.C. (the Plan), a defined benefit pension plan.
      The Plan covers people employed both under collectively bargained and
      noncollectively bargained arrangements. Certain people formerly employed
      by NYSEG (the Transferred Persons) receive credit under the Plan for
      compensation and service earned while employed by NYSEG. The amount of any
      benefit payable under the Plan to a Transferred Person will be offset by
      the amount of any benefit payable to such Transferred Person under the
      Retirement Plan for Employees of New York State Electric & Gas. Effective
      May 29, 1999, the ability to commence participation in the Plan and the
      accrual of benefits under the Plan ceased with respect to non-collectively
      bargained people and the accrued benefits of any such participant was
      fixed as of such date. As of December 31, 1999, the Plan was completely
      unfunded. The Partnership will make the required minimum contribution
      within the Employee Retirement Income Security Act (ERISA) guidelines,
      which require a minimum contribution to the Plan by September 15, 2000.
      Pension benefits are based on years of credited service, age of the
      participant, and average earnings.

      Significant assumptions used in the calculations of the net benefit cost
      and projected benefit obligation are as follows:

          Discount rate                                                   6.25%

          Rate of compensation increase                                   4.75%

          Expected long-term rate of return on plan assets                8.00%


     Net benefit cost for the period ended December 31, 1999, includes the
     following components (in thousands):


                                      F-15
<PAGE>


          Service cost                                                  $   498

          Interest cost on projected benefit obligation                     879
                                                                        --------

          Net benefit cost                                              $ 1,377
                                                                        ========

     Change in projected benefit obligation (in thousands):

          Projected benefit obligation at May 14, 1999                 $ 22,503

          Service cost                                                      498

          Interest cost                                                     879
                                                                       ---------

          Projected benefit obligation as of December 31, 1999         $ 23,880
                                                                       =========


      The projected benefit obligation of the Plan as of May 14, 1999, as
      actuarially determined, was recorded by the Partnership as a purchase
      accounting liability (see Note 3) under Accounting Principles Board
      Opinion (APB) No. 16, Business Combinations.

      Additionally, people of the Partnership and its subsidiaries participate
      in the AES Profit Sharing and Stock Ownership Plans. The plans provide
      Partnership matching contributions. Participants are fully vested in their
      own contributions and the Partnership's matching contributions.

10.   FAIR VALUE OF FINANCIAL INSTRUMENTS

      The fair value of the Partnership's current financial assets and
      liabilities approximate their carrying values. The fair value estimates
      are based on pertinent information available as of December 31, 1999. The
      Partnership is not aware of any factors that would significantly affect
      the estimated fair value amounts since that date.

11.   SEGMENT INFORMATION

      Under the provisions of SFAS No. 131, Disclosures About Segments of an
      Enterprise and Related Information, the Partnership's business is expected
      to be operated as one reportable segment, with operating income or loss
      being the measure of performance measured by the chief operating
      decision-maker.

12.   RESTRICTIONS ON DISTRIBUTIONS TO PARTNERS

      The Partnership's ability to make distributions to its partners is
      restricted by the terms of the agreements governing the leases of the
      Somerset and Cayuga Plants. The Partnership may make a distribution to its
      partners only on or within five business days after a semiannual rent
      payment date (commencing with the rent payment date occurring on July 2,
      2000), so long as the conditions as specified in the agreements have been
      met. As of December 31, 1999, no distributions have been made (see Note
      6).

                                   * * * * * *


                                      F-16
<PAGE>


INDEPENDENT AUDITORS' REPORT


To the Member of
 AES NY, L.L.C.

We have audited the accompanying consolidated balance sheet of AES NY, L.L.C.
(an indirect wholly owned subsidiary of The AES Corporation) and subsidiaries
(the Company) as of December 31, 1999. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statement presents fairly, in all
material respects, the financial position of AES NY, L.L.C. and subsidiaries as
of December 31, 1999, in conformity with generally accepted accounting
principles.


/s/Deloitte & Touche LLP

McLean, Virginia
March 17, 2000




                                      F-17
<PAGE>

AES NY, L.L.C.

CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(Amounts in Thousands)
-------------------------------------------------------------------------------


ASSETS
------

CURRENT ASSETS:
     Restricted cash:
        Operating - cash and cash equivalents                    $      6,274
        Revenue account                                                48,437
     Accounts receivable - trade                                       25,072
     Accounts receivable - other                                          368
     Inventory                                                         30,524
     Prepaid expenses                                                   6,327
                                                                 -------------

          Total current assets                                        117,002
                                                                 -------------
PROPERTY, PLANT, EQUIPMENT, AND
     RELATED ASSETS:
     Land                                                               7,300
     Electric generation assets (net of
        accumulated depreciation of $18,596)                          990,373
                                                                 -------------

          Total property, plant, equipment and related assets         997,673
                                                                 -------------
OTHER ASSETS:
     Rent reserve account                                              29,543
                                                                 -------------

TOTAL ASSETS                                                     $  1,144,218
                                                                 =============

LIABILITIES AND MEMBER'S EQUITY
-------------------------------

CURRENT LIABILITIES:
     Accounts payable                                            $        552
     Accrued interest expense                                          38,460
     Due to The AES Corporation                                         3,250
     Due to other affiliates                                              257
     Other accrued expenses                                            13,860
     Other liabilities                                                  7,837
                                                                 -------------

          Total current liabilities                                    64,216
                                                                 -------------

LONG-TERM LIABILITIES:
     Lease financing - long-term                                      650,000
     Environmental remediation                                         13,641
     Defined benefit plan obligation                                   28,046
     Other liabilities                                                  6,603
                                                                 -------------

          Total long-term liabilities                                 698,290
                                                                 -------------

TOTAL LIABILITIES                                                     762,506

COMMITMENTS AND CONTINGENCIES (Note 6)

MINORITY INTEREST                                                     377,895

MEMBER'S EQUITY                                                         3,817
                                                                 -------------

TOTAL LIABILITIES AND MEMBER'S EQUITY                            $  1,144,218
                                                                 =============


                                      F-18
<PAGE>


AES NY, L.L.C.

NOTES TO CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
================================================================================


1.    GENERAL

      AES NY, L.L.C. (the Company), a Delaware limited liability company, was
      formed on August 2, 1998. The Company is the sole general partner of AES
      Eastern Energy, L.P. (AEE), owning a one percent interest in AEE. The
      Company is also the sole general partner of AES Creative Resources, L.P.
      (ACR), owning a one percent interest in ACR. AES NY Holdings, L.L.C. is
      the sole member of the Company. The Company is an indirect wholly owned
      subsidiary of The AES Corporation (AES). The Company began operations on
      May 14, 1999. Prior to that date, the Company had no operations.

      The Company was established for the purpose of acting as the general
      partner of both AEE and ACR. In this capacity, the Company is responsible
      for the day-to-day management of AEE and ACR and its operations and
      affairs, and is responsible for all liabilities and obligations of both
      entities.

      AEE, a Delaware limited Company, was formed on December 2, 1998. AEE's
      wholly owned subsidiaries are AES Somerset, L.L.C., AES Cayuga, L.L.C.,
      and AEE2, L.L.C., (which wholly owns AES Westover, L.L.C. and AES
      Greenidge, L.L.C.). AEE began operations on May 14, 1999. Prior to that
      date, AEE had no operations. AEE was established for the purpose of owning
      and operating four coal-fired electric generating stations (the AEE
      Plants) with a total combined capacity of 1,268 MW. Two of the plants are
      owned by AEE and two of the plants are leased by AEE (see Note 5), and are
      operated by AEE's wholly owned subsidiaries in the state of NY, pursuant
      to operation and maintenance agreements with AEE. The limited partner of
      AEE is AES NY 2, L.L.C. (the Limited Partner), which is also an indirect
      wholly owned subsidiary of AES.

      ACR, a Delaware limited Company, was formed on December 3, 1998. ACR's
      wholly owned subsidiaries are AES Jennison, L.L.C. and AES Hickling,
      L.L.C., which each owns a coal-fired electric generating station (the ACR
      Plants) with a combined capacity of 156 MW. ACR began operations on May
      14, 1999. Prior to that date ACR had no operations. The limited partner of
      ACR is AES NY 2, L.L.C. The AEE Plants and the ACR Plants are hereinafter
      referred to collectively as "the Plants."

      AEE and ACR have entered into two-year agreements for energy marketing
      services with Merchant Energy Group of the Americas, Inc. (MEGA), an
      Annapolis, Maryland-based subsidiary of Gener S.A., a Chilean independent
      power producer. MEGA is responsible for marketing AEE's and ACR's electric
      energy, installed capacity, and ancillary services.

      The AEE and ACR Plants sell generated electricity, as well as installed
      capacity and ancillary services, directly into the New York Independent
      System Operator (ISO) system, Pennsylvania, New Jersey, Maryland Power
      Pool (PJM), and New England Power Pool (NEPOOL). For Federal regulatory
      purposes, AEE and ACR are exempt wholesale generators (EWGs). As EWGs, AEE
      and ACR cannot make retail sales of electricity, and can only make
      wholesale sales of electricity, installed capacity, and ancillary services
      into wholesale power markets.


                                      F-19
<PAGE>


2.    SIGNIFICANT ACCOUNTING POLICIES

      Principles of Consolidation - The consolidated financial statement
      includes the accounts of the Company, AEE and ACR (including all
      subsidiaries). The financial statement is presented on a consolidated
      basis because the Company, as general partner, controls the operations of
      AEE and ACR (Note 1). All material intercompany transactions have been
      eliminated. The 99% limited partner ownerships of AEE and ACR are
      presented as minority interest.

      The assets of the Company on a stand-alone basis at December 31, 1999
      (using the equity method of accounting) consist only of the 1% ownership
      interest in AEE ($3,782,000) and the 1% ownership interest in ACR
      ($35,000). The Company had no liabilities as of December 31, 1999, other
      than liabilities of AEE and ACR for which it is responsible as General
      Partner of AEE and ACR.

      Cash and Cash Equivalents - The Company considers cash on hand, deposits
      in banks, and short-term marketable securities with original maturities of
      three months or less in operating accounts to be cash and cash
      equivalents.

      Restricted Cash - Under the terms of the deposit and disbursement
      agreement entered into by AEE in connection with the lease of two AEE
      Plants (see Note 5), all revenues of AEE and its subsidiaries are
      deposited into a revenue account administered by the depositary agent. On
      request of AEE and in accordance with the terms of the deposit and
      disbursement agreement, funds are transferred from the revenue account to
      other operating accounts administered by the depositary agent for payment
      of operating and maintenance costs, lease obligations, debt service,
      reserve requirements and distributions. Payment of operating and
      maintenance costs (other than actual fuel costs) in excess of 125% of the
      annual operating budget requires confirmation from an independent engineer
      that such payment is based on reasonable assumptions.

      Inventory - Inventory, valued at fair market value on the date of
      acquisition (see Note 3), and subsequently valued at the lower of cost
      (average cost basis) or market, consists of coal and other raw materials
      used in generating electricity, spare parts, materials, and supplies.

      Inventory, as of December 31, 1999, consisted of the following (in
      thousands):

        Coal and other raw materials                                  $ 10,779
        Spare parts, materials, and supplies                            19,745
                                                                      ---------

        Total                                                         $ 30,524
                                                                      =========

      Property, Plant, Equipment, and Related Assets - Electric generation
      assets that existed at the date of acquisition (see Note 3) are recorded
      at fair market value. The AES Somerset (formerly known as Kintigh) and AES
      Cayuga (formerly known as Milliken) Plants, which represent $650 million
      of the electric generation assets, are subject to a leasing arrangement
      accounted for as a financing (see Note 5). Additions or improvements
      thereafter are recorded at cost. Depreciation is computed using the
      straight-line method over the 34-year and 28-year lease terms for the
      Somerset and Cayuga Plants, respectively, and over the estimated useful
      lives for the other AEE fixed assets, which range from 7 to 35 years.
      Maintenance and repairs are charged to expense as incurred.

      Management of ACR intends to dispose of or shut down the AES Jennison and
      AES Hickling plants within the next three years. As such, the electric
      generation assets of these two plants are being


                                      F-20
<PAGE>


      depreciated over three years using the straight-line method. Maintenance
      and repairs are charged to expense as incurred.

      Electric generation assets as of December 31, 1999, consisted of the
      following (in thousands):


                                                     AEE       ACR      Total

   Electric generation tangible assets          $ 762,890   $ 5,028   $767,918
   Other intangible assets                        241,051       -     $241,051
   Accumulated depreciation                       (17,389)   (1,207)  $(18,596)
                                                ---------   -------   ---------

   Total                                        $ 986,552   $ 3,821   $990,373
                                                =========   =======   =========

      Other intangible assets represent assets recorded by AEE that were
      identified and valued in an independent appraisal and that are directly
      related to the physical assets of the AEE Plants. These include trading
      benefits derived from the ability of AEE to enter new deregulated markets
      through sale of the output of the AEE Plants, potential revenues from
      ancillary services, and mitigation of environmental risk due to the
      advanced emissions control equipment that has already been installed at
      the principal AEE Plants. Trading benefits provide both the AEE Plants and
      AEE the ability to arbitrage electricity generation and installed capacity
      in order to capture the most lucrative prices in available markets.
      Ancillary services include voltage support, spinning reserves, and other
      activities that enhance the stability and reliability of the transmission
      system. These services will be purchased by the organizations that manage
      power systems rather than wholesale electricity customers. Mitigation of
      environmental risk reflects AEE's ability, created by pollution control
      devices, to effectively use lower cost and lower grade coal to provide the
      same electricity output as its competitors. Amortization is computed on
      the same basis as the related assets (28 to 34 years).

      Rent Reserve Account - As part of AEE's lease obligation (see Note 5), AEE
      is required to maintain a rent reserve account equal to the maximum
      semiannual payment with respect to the sum of basic rent (other than
      deferrable payments) and fixed charges expected to become due on any one
      basic rent payment date in the immediately succeeding three-year period.
      As of December 31, 1999, AEE had fulfilled this obligation by entering
      into a Payment Undertaking Agreement, dated as of May 1, 1999, among AEE,
      each Owner Trust (see Note 3) and Morgan Guaranty Trust Company of New
      York (the Payment Undertaking Agreement). On May 14, 1999, AEE deposited
      with Morgan Guaranty Trust Company of New York approximately $28.7 million
      pursuant to the Payment Undertaking Agreement. The accreted value of the
      Payment Undertaking Agreement at any time includes interest earned
      thereunder at an interest rate of 4.79% per annum. Interest earnings as of
      December 31, 1999, were approximately $870,000 and are included in the
      rent reserve account balance. At December 31, 1999, the accreted value of
      the Payment Undertaking Agreement exceeded the required balance of the
      rent reserve account. This amount is being accounted for as a restricted
      cash balance and is included within the rent reserve account on the
      accompanying balance sheet as it can only be utilized to satisfy lease
      obligations.

      In the future, AEE may fulfill its obligation to maintain the required
      balance of the rent reserve account either by deposits into the rent
      reserve account or by making amounts available under the Payment
      Undertaking Agreement, such that the aggregate amount of such deposits in
      the rent reserve account and amounts available to be paid under the
      Payment Undertaking Agreement are equal to the required balance of the
      rent reserve account.


                                      F-21

<PAGE>


      Line of Credit Agreement - AEE has established a three-year revolving
      working capital credit facility of up to $50 million for the purpose of
      making funds available to pay for certain operating and maintenance costs.
      Amounts outstanding under the working capital credit facility are required
      to be reduced to zero for thirty days prior to any one lease rental
      payment date in each year. Interest accrues on outstanding balances at a
      base rate plus 1% or the applicable adjusted Eurodollar rate plus 1.75%.
      The working capital credit facility is collateralized by a pledge of AEE's
      membership interest in AEE2, L.L.C. and by a security interest in
      equipment and personal property of AEE2, L.L.C. As of December 31, 1999,
      no amounts were outstanding under this credit facility.

      Revenue Recognition - Revenues from the sale of electricity are recorded
      based upon output delivered and rates specified under contract terms.
      Revenues for ancillary and other services are recorded when the services
      are rendered.

      NY Transition Agreement - As the New York ISO system represents a
      deregulated environment, the ISO will attempt to ensure stability of the
      power grid in New York by requiring each entity engaged in retail sales of
      electricity to obtain installed capacity commitments from generators in an
      amount equal to the entity's forecasted peak load plus a reserve margin.
      This requirement is intended to ensure that an adequate supply of
      electricity is always available. The Company entered into a two-year
      transition agreement with New York State Electric & Gas Corporation
      (NYSEG) pursuant to which AEE and ACR will sell their installed capacity
      to NYSEG in order to permit NYSEG to comply with ISO standards for system
      stability. The transition agreement was assumed by AEE and ACR on the date
      of acquisition of the AEE and the ACR Plants. The Company recognizes
      revenue under this contract as it is earned, which is $68 per MW per day
      for installed capacity made available.

      Income Taxes - A provision for Federal and state income taxes has not been
      made in the accompanying financial statements since the Company, AEE and
      ACR do not pay income taxes but rather allocate their revenues and
      expenses to the member or partners. Differences between the results of
      operations reported in the financial statements and those reported on
      individual partners' or member's income tax returns are due primarily to
      the use of different lease treatment, accelerated depreciation methods,
      and shorter useful lives for income tax purposes.

      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.

      Fiscal Year-End - The Company's fiscal year will end on December 31 of
      each year.

      Comprehensive Income - In 1999 the Company adopted Statement of Financial
      Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which
      establishes rules for the reporting of comprehensive income and its
      components. The adoption of SFAS No. 130 had no impact on the Company's
      financial statements as it had no items of other comprehensive income.

      New Accounting Pronouncements - In June 1998, the Financial Accounting
      Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
      Instruments and Hedging Activities, which established standards for the
      accounting and reporting of derivative financial instruments and hedging
      activities. The standard will be adopted by the Company during fiscal year
      2001. The Company is currently evaluating the impact of the adoption of
      SFAS No. 133.


                                      F-22

<PAGE>

3.    ACQUISITION

      On May 14, 1999, the AEE Plants were acquired from NYSEG for approximately
      $914 million. AEE acquired ownership of two of the Plants, Westover
      (formerly known as Goudy) and Greenidge. The other two Plants, Somerset
      and Cayuga, were acquired for $650 million by twelve unrelated third-party
      owner trusts (collectively, the Owner Trusts) organized by three unrelated
      institutional investors. Simultaneously, AEE entered into separate leasing
      agreements for the Somerset and Cayuga Plants with the Owner Trusts. The
      Company accounts for these leases as financing leases.

      The acquisition of the AEE Plants was financed by capital contributions
      from the Company and the Limited Partner in an aggregate amount equal to
      the purchase price for the Plants, certain associated costs and expenses,
      and certain amounts for working capital less the net proceeds from the
      leasing transactions with respect to the Somerset and Cayuga Plants
      described above. The acquisition has been accounted for as an asset
      purchase.

      In connection with the acquisition of the AEE Plants, NYSEG engaged an
      environmental consulting firm to perform an environmental analysis of the
      potential required remediations for soil and ground water contamination.
      AEE engaged another environmental consulting firm to evaluate the costs
      estimated by NYSEG's consultants. The environmental analysis and AEE's
      estimate of other environmental remediation costs indicated that there
      existed a range of potential remediation costs of between $8.5 million and
      $19.7 million, with a most probable liability of approximately $12
      million. AEE recorded $12 million as an undiscounted liability under
      purchase accounting for the projected remediation cost at the acquisition
      date. As of December 31, 1999, $2 million was classified as a current
      liability.

      Also in connection with the acquisition, the Company entered into an
      agreement for the construction of a selective catalytic reduction (SCR)
      facility at the Somerset Plant. The SCR facility is designed to
      significantly reduce the amount of nitrogen oxide emissions from the
      burning of coal fuel at the Somerset Plant. AEE acquired the SCR work in
      progress from the Company on May 14, 1999, for approximately $31 million,
      which was the contract price for the SCR. Construction of this asset began
      prior to the acquisition of the AEE Plants. On the acquisition date, the
      Somerset Plant was shut down to complete construction and make other
      improvements. The outage lasted until late June 1999. All costs associated
      with the installation of the SCR, including construction and engineering
      costs, wages of people involved in the construction, and interest expense
      during the period were capitalized by AEE. The Somerset Plant was placed
      back in service on June 28, 1999.

      AEE receives certain payments for installed capacity under the New York
      Transition Agreement (see Note 2). Payments received while the Somerset
      Plant was out of service, of approximately $2.1 million, have reduced the
      total amount of capitalized costs. Total costs capitalized during
      construction were approximately $52 million, which included approximately
      $5.2 million in capitalized interest.

      The purchase agreement with NYSEG relating to the acquisition of the AEE
      Plants provided for a post-closing adjustment of the purchase price to
      reflect the actual value of inventories and a pro rata allocation of
      various expenses as of the acquisition date. As a result of this
      adjustment and to settle other contractual obligations, NYSEG returned
      approximately $1.6 million.

      Also, in connection with this transaction, ACR acquired from NYSEG two
      older coal-fired plants, Jennison and Hickling (Note 1). An environmental
      liability of $2.6 million was recorded in connection with this
      acquisition, which represented the most probable liability based on a
      range calculated by NYSEG's environmental consultants and reviewed by
      other environmental consultants hired by ACR.


                                      F-23

<PAGE>


4.    CAPITALIZATION

      The Company is indirectly owned by AES NY Funding, L.L.C. (AES Funding),
      which is a special purpose financing vehicle established to raise a
      portion of the capital contributed to AEE and ACR through the Company and
      AES NY 2, L.L.C, the limited partner of AEE and ACR. AES Funding is a
      direct wholly owned subsidiary of AES.

      On May 11, 1999, AES Funding entered into a three-year loan agreement with
      a syndicate of banks, with Morgan Guaranty Trust Company of New York as
      Agent, in the amount of $300 million. AES Funding contributed 1% of this
      amount to the Company and 99% of this amount to AES NY 2 which, in turn,
      made an aggregate capital contribution of $300 million to AEE. AES also
      contributed capital in the amount of approximately $57 million through AES
      Funding, which subsequently contributed this amount to the Company and AES
      NY 2 which, in turn, made a capital contribution of approximately $54
      million to AEE and approximately $3 million to ACR.

      Collateral for the loan consists of a pledge of the membership interests
      of AES NY Holdings, L.L.C., a direct wholly owned subsidiary of AES
      Funding, which is the 100% direct owner of both the Company and AES NY 2,
      L.L.C.

      AES Funding is dependent upon the residual cash flows from AEE and ACR
      received in the form of dividends to service its debt. The loan is payable
      on May 14, 2002, and bears interest at a variable rate based on the terms
      of the loan agreement, which was 9.25% as of December 31, 1999. AEE and
      ACR have no obligation to repay this loan. If AES Funding were unable to
      repay this loan, one of the remedies available to the lenders would be to
      seek to sell the membership interests in AES NY Holdings, L.L.C., which
      would divest AES of control of the Company, AEE, and ACR.

5.    LEASE FINANCING

      AEE's leases for the Somerset and Cayuga Plants are accounted for as a
      financing (see Note 3). Minimum lease payments and the present value of
      the lease obligation are as follows (in thousands):

                                                                       Lease
      Fiscal Years Ending December 31,                                Payments

      2000                                                         $   67,462
      2001                                                             58,422
      2002                                                             62,577
      2003                                                             57,551
      2004                                                             63,450
      Thereafter                                                    1,435,672
                                                                   -----------

      Total minimum lease payments                                  1,745,134

      Less imputed interest                                        (1,095,134)
                                                                   -----------

      Present value of mimimum lease payments                      $  650,000
                                                                   ===========

      Through January 2, 2017, and so long as no lease event of default exists,
      a portion of the rent payable under each lease may be deferred until after
      the final scheduled payment of the debt incurred by the Owner Trusts to
      acquire the Somerset and Cayuga Plants.


                                      F-24

<PAGE>


      The lease obligations are payable to the Owner Trusts. These obligations
      bear imputed interest at 9.252% and 9.024% for the Somerset and Cayuga
      facilities, respectively. Total assets under the leases of these two
      Plants were $650 million at December 31, 1999. These amounts are included
      in electric generation assets. The related accumulated depreciation,
      combined for both leased facilities, as of December 31, 1999, was
      approximately $11.1 million.

      The agreements governing the leases restrict AEE's ability to incur
      additional indebtedness, engage in other businesses, sell its assets, or
      merge with another entity.

      AEE's ability to make distributions to its partners is restricted by the
      terms of the agreements governing the leases of the AEE Somerset and
      Cayuga Plants. The ability of AEE to make distributions to its partners is
      restricted unless certain covenants, including the maintenance of certain
      coverage ratios, are met. In addition, AEE may make a distribution to its
      partners only on or within five business days after a semiannual rent
      payment date (commencing with the rent payment date occurring on July 2,
      2000) so long as the conditions as specified in the agreements have been
      met. As of December 31, 1999, no distributions have been made.

      In connection with the lease agreements, AEE is required to maintain an
      additional liquidity account. The required balance in the additional
      liquidity account was initially equal to the greater of $65 million less
      the balance in the rent reserve account on May 14, 1999 (see Note 2) or
      $29 million. As of December 31, 1999, AEE had fulfilled its obligation to
      fund the additional liquidity account by establishing a letter of credit,
      issued by BankBoston, dated May 14, 1999, in the stated amount of
      approximately $36 million (the Additional Liquidity Letter of Credit).
      This letter of credit was established by AES for the benefit of AEE.
      However, AEE is obligated to replenish or replace this letter of credit in
      the event it is drawn upon or needs to be replaced.

      An aggregate amount in excess of $65 million is available to be drawn
      under the Payment Undertaking Agreement (see Note 2) and the Additional
      Liquidity Letter of Credit for making rental payments. In the event
      sufficient amounts to make rental payments are not available from other
      sources, a withdrawal from the additional liquidity account (which may
      include making a drawing under the Additional Liquidity Letter of Credit)
      and from the rent reserve account (which may include making a demand under
      the Payment Undertaking Agreement) may be made for rental payments.

6.    COMMITMENTS AND CONTINGENCIES

      Coal Purchases - In connection with the acquisition of the AEE Plants, AEE
      has assumed from NYSEG an agreement to purchase the coal required by the
      AEE Somerset , Cayuga, and Westover plants. Each year, either party can
      request renegotiation of the price of one-third of the coal supplied
      pursuant to this agreement. During 2000, the coal suppliers are committed
      to sell and AEE is committed to purchase all three lots of coal and either
      party may request renegotiation of one lot of coal for the following year.
      If either party requested renegotiation during 2000 but the parties failed
      to reach agreement, then the parties would have commitments with respect
      to only two lots in 2001. If the same thing happened in 2001, the parties
      would have commitments with respect to only one lot in 2002. Either party
      could terminate the contract in its sole discretion at the end of 2002. As
      of the acquisition date, the contract prices were above the market price,
      and AEE recorded a purchase accounting liability for approximately $15.7
      million related to the fulfillment of its obligation to purchase coal
      under this agreement. As of December 31, 1999, the remaining liability was
      approximately $11.8 million.

                        Transmission Agreements - On August 3, 1998, the Company
      entered into an agreement for the purpose of transferring certain rights
      and obligations from NYSEG to the Company under an existing transmission
      agreement among Niagara Mohawk Power Corporation (NIMO), the New


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<PAGE>


      York Power Authority, NYSEG, and Rochester Gas & Electric Corporation, and
      an existing transmission agreement between NYSEG and NIMO. This agreement
      provides for the assignment of rights to transmit energy from the Somerset
      Plant and other sources to remote load areas and other delivery points,
      and was assumed by AEE on the date of acquisition of the Plants. In
      accordance with its plan, as of the acquisition date, AEE discontinued
      using this service. AEE does not intend to transmit over these lines and
      was required to pay the current fees until the effective cancellation
      date, November 19, 1999. These fees were approximately $3.4 million over
      the six months ended December 31, 1999, and were recorded as a purchase
      accounting liability. Because AEE did not use the lines during this
      period, AEE received no economic benefit subsequent to the acquisition.

                        AEE was informed by NIMO that AEE would be responsible
      for the monthly fees of $500,640 to the original termination date of
      October 1, 2004. On October 5, 1999, AEE filed a complaint against NIMO
      alleging that AEE has a right to non-firm transmission service upon six
      months prior notice without payment of $500,640 in monthly fees subsequent
      to the cancellation date of November 19, 1999. On March 9, 2000, a
      settlement was reached between AEE and NIMO, which is subject to approval
      by the Federal Energy Regulatory Commission (FERC). According to the
      settlement, AEE will continue to pay NIMO a fixed rate of $500,640 per
      month during the period of November 20, 1999, to October 1, 2004 and in
      turn, will receive a form of transmission service commencing on May 1,
      2000, which AEE believes will provide an economic benefit over the period
      of May 1, 2000 to October 1, 2004. AEE shall have the right under a Remote
      Load Wheeling Agreement (RLWA) to transmit over firm transmission lines
      from the Somerset Plant. AEE shall have the right to convert up to 298 MW
      of its firm service to any point on NIMO's transmission system provided
      that AEE shall not be entitled to receive any transmission service between
      the Somerset Plant and points under the RLWA. AEE shall have the right to
      refile the original complaint with FERC on May 1, 2001, provided that AEE
      notifies NIMO and NYSEG in writing of its intention to refile the
      complaint no later than February 1, 2001. At December 31, 1999, monthly
      fees due for the period from November 20, 1999 to May 1, 2000 pursuant to
      the settlement, aggregating approximately $2.8 million, have been recorded
      as a liability, because AEE receives no economic benefits associated with
      these payments during this period.

      Environmental - The Company has recorded a liability for environmental
      remediation associated with the acquisition of the AEE Plants and the ACR
      Plants (see Note 3). On an ongoing basis, the Company monitors its
      compliance with environmental laws. Because of the uncertainties
      associated with environmental compliance and remediation activities,
      future costs of compliance or remediation could be higher or lower than
      the amount currently accrued.

      On October 14, 1999, AEE received an information request letter from the
      New York Attorney General, which seeks detailed operating and maintenance
      history for the Westover and Greenidge Plants. On January 13, 2000, the
      Company received a subpoena from the New York State Department of
      Environmental Conservation seeking similar operating and maintenance
      history from the AEE and ACR Plants. This information is being sought in
      connection with the Attorney General's and the Department of Environmental
      Conservation's investigations of several electricity generating stations
      in New York that are suspected of undertaking modifications in the past
      without undergoing an air permitting review. If the Attorney General or
      the Department of Environmental Conservation does file an enforcement
      action against the Somerset, Cayuga, Westover, or Greenidge Plants, then
      penalties might be imposed and further emission reductions may be
      necessary at these Plants. The Company is unable to estimate the impact,
      if any, of these investigations on its financial condition or results of
      operations.

      Nitrogen Oxide and Sulfur Dioxide Emission Allowances - AEE Plants and the
      ACR Plants emit nitrogen oxide (NOx) and sulfur dioxide (SO2) as a result
      of burning coal to produce electricity. The six Plants have been allocated
      allowances by the New York Department of Environmental Conservation to
      emit NOx during the ozone season, which runs from May 1 to September 30.
      Each NOx allowance authorizes


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<PAGE>


      the emission of one ton of NOx during the ozone season. The six Plants are
      also subject to SO2 emission allowance requirements imposed by the Federal
      Environmental Protection Agency. Each SO2 allowance authorizes the
      emission of one ton of SO2 during the calendar year. Two of the Plants,
      Cayuga and Greenidge, are currently subject to SO2 allowance requirements,
      and effective January 1, 2000, all six Plants are required to hold
      sufficient allowances to emit SO2. Both NOx and SO2 allowances may be
      bought, sold, or traded. If NOx and/or SO2 emissions exceed the allowance
      amounts allocated to the six Plants, then the Company may need to purchase
      additional allowances on the open market or otherwise reduce its
      production of electricity to stay within the allocated amounts.

      In October 1999, ACR entered into a consent order with the New York State
      Department of Environmental Conservation to resolve alleged violations of
      the water quality standards in the groundwater downgradient of an ash
      disposal site. The consent order includes a suspended $5,000 civil penalty
      and a requirement to submit a work plan to initiate closure of the
      landfill by October 8, 2000. The consent order also calls for a site
      investigation and there is a possibility that some groundwater remediation
      at the site may be required. AEE2, L.L.C. will contribute two-thirds of
      the costs to close the landfill, which are anticipated to be approximately
      $3 million, as additional costs for long term groundwater monitoring.
      While the actual closure costs may exceed $3 million, which is included in
      the environmental remediation liability (see Note 3), management does not
      expect any added closure costs to be material.

7.    RELATED PARTY TRANSACTIONS

      AEE has entered into a contract with Somerset Railroad Corporation (SRC),
      a wholly owned subsidiary of AES NY 3, L.L.C., which is an indirect wholly
      owned subsidiary of AES, pursuant to which SRC will haul coal and
      limestone to the Somerset Plant and make its rail cars available to
      transport coal to the Cayuga Plant. AEE will pay amounts sufficient to
      enable SRC to pay all of its operating and other expenses, including all
      out-of-pocket expenses, taxes, interest on and principal of SRC's
      outstanding indebtedness, and all capital expenditures necessary to permit
      SRC to continue to provide rail service to the Somerset and Cayuga Plants.
      The principal on SRC's outstanding indebtedness is approximately $26
      million as of December 31, 1999, and is due on May 5, 2000. This term loan
      bears interest at a rate per annum equal to LIBOR plus 1.35% or a base
      rate plus 1.25%. SRC intends to refinance this indebtedness prior to the
      due date. As of December 31, 1999, approximately $2.3 million in expenses
      relating to this agreement is recorded by AEE.

      Prior to June 30, 1999, AES paid approximately $3.2 million in costs
      related to the acquisition of the NYSEG plants, which are to be reimbursed
      by AEE. Of the $3.2 million, approximately $1.1 million was for internal
      costs incurred by AES, and was treated as a reduction of contributed
      capital.

8.    BENEFIT PLANS

      Effective May 14, 1999, the Company and its subsidiaries adopted The
      Retirement Plan for Employees of AES NY, L.L.C. (the Plan), a defined
      benefit pension plan. The Plan covers people employed both under
      collectively bargained and noncollectively bargained arrangements. Certain
      people formerly employed by NYSEG (the Transferred Persons) receive credit
      under the Plan for compensation and service earned while employed by
      NYSEG. The amount of any benefit payable under the Plan to a Transferred
      Person will be offset by the amount of any benefit payable to such
      Transferred Person under the Retirement Plan for Employees of New York
      State Electric & Gas. Effective May 29, 1999, the ability to commence
      participation in the Plan and the accrual of benefits under the Plan
      ceased with respect to non-collectively bargained people and the accrued
      benefits of any such participant was fixed as of such date. As of December
      31, 1999, the Plan was completely unfunded. The Company will make


                                      F-27

<PAGE>


      the required minimum contribution within the Employee Retirement Income
      Security Act (ERISA) guidelines, which require a minimum contribution to
      the Plan by September 15, 2000. Pension benefits are based on years of
      credited service, age of the participant, and average earnings.

      Significant assumptions used in the calculations of projected benefit
      obligation are as follows:

         Discount Rate                                                    6.25%

         Rate of compensation increase                                    4.75%

         Expected long-term rate of return on plan assets                 8.00%


      The projected benefit obligation as of December 31, 1999, is approximately
      $28 million.

      The projected benefit obligation of the Plan as of May 14, 1999, as
      actuarially determined, was recorded by the Company as a purchase
      accounting liability (see Note 3) under Accounting Principles Board
      Opinion (APB) No. 16, Business Combinations.

      Additionally, employees of the Company and its subsidiaries participate in
      the AES Profit Sharing and Stock Ownership Plans. The plans provide for
      Company matching contributions. Participants are fully vested in their own
      contributions and the Company's matching contributions.

9.    FAIR VALUE OF FINANCIAL INSTRUMENTS

      The fair value of the Company's current financial assets and liabilities
      approximate their carrying values. The fair value estimates are based on
      pertinent information available as of December 31, 1999. The Company is
      not aware of any factors that would significantly affect the estimated
      fair value amounts since that date.

10.   SEGMENT INFORMATION

      Under the provisions of SFAS No. 131, Disclosures About Segments of an
      Enterprise and Related Information, the Company's business is expected to
      be operated as one reportable segment, with operating income or loss being
      the measure of performance measured by the chief operating decision-maker.

                                   * * * * * *


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