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, 2001
                        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  X   No
                                   -----   ----

         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. 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 ("Somerset")(formerly known as the Kintigh Generating Station) and the
Cayuga Generating Station ("Cayuga")(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 Somerset and Cayuga are
located and two additional coal-fired electricity generating stations, the
Westover Generating Station ("Westover")(formerly known as the Goudey Generating
Station) and the Greenidge Generating Station ("Greenidge")(together with the
real property upon which they are located). We leased a portion of the real
property on which Somerset and Cayuga are located and a selective catalytic
reduction system ("SCR"), which reduces emissions of nitrogen oxides, that was
then being installed at Somerset to the special purpose business trusts, which
subleased them back to us. As part of the transaction, AES NY3,L.L.C., an
indirect wholly owned 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 Somerset. Somerset Railroad entered
into a coal hauling agreement with us to transport coal. AES Creative Resources,
L.P., an indirect wholly owned 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. Westover and Greenidge are owned by our 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.

         The agreements governing the leases of Somerset and Cayuga and our
working capital credit facility impose severe restrictions on our ability to
make distributions of cash or other assets to our owners and on the ability of
our owners to withdraw cash or other assets from us. These restrictions are
intended to assure that we have paid all of our operating and maintenance
expenses and all of our obligations under our leases and under our working
capital credit facility before any assets are distributed to or withdrawn by our
owners. We may make a distribution to our owners on or within ten business days
after a rent payment date for the Somerset and Cayuga leases so long as the
following conditions are satisfied:

         (1) all rent under the leases for Somerset and Cayuga including
         deferrable payments, must have been paid to date;

         (2) amounts on deposit or deemed on deposit in the rent reserve account
         and the additional liquidity account established in connection with the
         pass through trust certificates issued to finance the acquisition of
         Somerset and Cayuga must be equal to or greater than the rent reserve
         account required balance or the additional liquidity required balance,
         as applicable;

         (3) no lease material default, lease event of default or event of
         default under any permitted indebtedness shall have occurred and be
         then continuing;

         (4) no amounts may be outstanding under the working capital credit
         facility;


<PAGE>


         (5) we have no indemnity currently due and payable under specified
         provisions of the participation agreements relating to the Somerset and
         Cayuga leases or any other operative document or any obligation to fund
         the indemnity accounts (as defined in the leases) under the leases;

         (6) the coverage ratios for each of the two semiannual rent payment
         periods immediately preceding the rent payment date (based on actual
         operating history) must be equal to or greater than the required
         coverage ratio and the pro forma coverage ratios for each of the four
         semiannual periods immediately succeeding this rent payment date must
         be equal to or greater than the required coverage ratio;

         (7) with respect to the Somerset Railroad credit facility or any
         replacement facility, no event of default shall have occurred and be
         then continuing under the facilities and the remaining term of the
         Somerset Railroad credit facility or any replacement facility shall not
         be less than 30 days.

         On February 19, 2002, The AES Corporation announced that it intends to
reposition itself in the electric business by fully contracting or divesting its
merchant generation businesses. The AES Corporation said that it made this
decision to reduce earnings volatility and strengthen its balance sheet. We are
one of the merchant generating businesses. Our business could be fully
contracted if we were to sign one or more long-term power sales agreements for
the output of our electricity generating stations. As of the date of this Annual
Report on Form 10-K, no specific proposal to fully contract or divest our
operations is under consideration. We are adopting a policy of not commenting on
proposed transactions and we disclaim any obligation to provide information with
respect to proposed transactions until a definitive agreement has been reached.

         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.

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

         o    Operation of our electricity generating 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 terrorist activity or other
              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    The perception of the public and government officials in the
              markets we serve and in other deregulated markets that deregulated
              prices for electric energy are higher than expected may result in
              some degree of re-regulation of the markets in which we sell our
              electric energy, installed capacity and ancillary services. This
              re-regulation might take the form, for example, of lowering of
              caps on wholesale electric




                                        2


<PAGE>


              energy prices during periods of peak demand.

         o    The addition of new generating capacity in the New York region in
              excess of the amount required to meet increased demand could
              result in the reduction of market clearing prices in periods of
              peak demand, which would reduce the profitability of our
              operations.

         o    An increase in the real price of coal may 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 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 Somerset and Cayuga.

         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:




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<PAGE>


                               The AES Corporation-------------
                                       |                       |
                                  AES New York        AES Odyssey, L.L.C.
                                Funding, L.L.C.
                                       |
                              AES NY Holdings, 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.
(Somerset)       (Cayuga)          |
                                   |
                             ------------
                             |           |
                             |           |
                            AES         AES
                         Westover,    Greenidge,
                           L.L.C.       L.L.C.
                        (Westover)    (Greenidge)


         The AES Corporation

         The AES Corporation, was incorporated under the laws of Delaware in
1981 and is headquartered in Arlington, Virginia. The AES Corporation is a
leading global power company. Its mission is to help serve the world's need for
electricity. The AES Corporation is dedicated to providing electricity worldwide
in a socially responsible way.

         The AES Corporation is a leading global power company comprised of
competitive generation, distribution, and retail supply businesses in Argentina,
Australia, Bangladesh, Brazil, Canada, China, Dominican Republic, El Salvador,
Georgia, Hungary, Kazakhstan, the Netherlands, Mexico, Pakistan, Panama, the
United Kingdom, the United States, and Venezuela.

         The AES Corporation's generating assets include interests in one
hundred and twenty-eight facilities totaling over 44 gigawatts of capacity. The
AES Corporation's electricity distribution network has over 954,000 km of
conductor and associated rights of way and sells over 114,000 gigawatt hours per
year to over 15 million end-use customers. In addition, through its various
retail electricity supply businesses, The AES Corporation sells electricity to
over 154,000 end-use customers.

         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 Somerset and Cayuga. 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 Somerset and Cayuga or the secured lease
obligation notes issued by the special purpose business trusts that own those
electricity generating stations.




                                        4


<PAGE>


         The AES Corporation's Corporate Culture

         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 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.




                                        5


<PAGE>


         New York Power Market

         The New York Independent System Operator ("ISO") commenced operations
in November 1999 and consists of the ISO and the New York State Reliability
Council. 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 ISO operates a
two-settlement system for calculating Location-Based Marginal Prices ("LBMP") of
electric energy. The first settlement system is a financially binding market for
delivery of electric energy on the following day and the second settlement
system is the balancing market for immediate delivery of electric energy. LBMP
is the incremental cost to supply load at a specific location in the grid.
Locational energy price differentials represent the opportunity cost for
transmission between specific locations in the grid.

         In July 2001, the Federal Energy Regulatory Commission directed the New
York ISO and adjacent power market operators to engage in a 45-day mediation
process to form one regional transmission organization for the northeastern
region. The participants released a business plan on September 17, 2001. On
January 28, 2002 the New York ISO and ISO New England entered into an agreement
to develop a plan to establish a common market design for a regional
transmission organization. We cannot predict if or when these initiatives will
actually result in the creation of a regional transmission organization or what
effect the creation of such an organization might have on the markets in which
we do business.

         The New York power market is interconnected with ISO New England to the
northeast, Hydro Quebec and Ontario Hydro to the north, and PJM
(Pennsylvania-New Jersey-Maryland) Interconnection to the south.

         The transmission of electricity between states and between regions
within New York State 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. Until April 30, 2008, our ability to
sell electric energy into neighboring markets is also 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 because we have entered into
bilateral contracts for the sale of a substantial portion of our unforced
capacity to load serving entities, i.e., an entity selling electric energy to
consumers of electric energy, including regulated distribution utilities,
municipalities and energy supply companies, in New York.

         At the time we acquired our electricity generating stations, we entered
into a two-year agreement for energy marketing services with Merchant Energy
Group of the Americas, Inc. ("MEGA"), then an Annapolis, Maryland-based
subsidiary of Gener S.A. MEGA has since been sold by Gener S.A., which is now a
wholly owned subsidiary of The AES Corporation. MEGA was responsible for
marketing our electric energy, installed capacity and ancillary services in the
deregulated New York power market. The marketing agreement between us and MEGA
was terminated effective November 26, 2000. We have paid MEGA $1.6 million and
made the first of an additional four payments of $225,000 each from 2002 to 2005
as part of the termination of our agreement with MEGA.

         We entered into an arrangement with AES Odyssey, L.L.C. ("Odyssey"), a
direct wholly-owned subsidiary of The AES Corporation. This agreement commenced
on November 27, 2000 and is for a term of three years. Odyssey provides data
management, marketing, scheduling, invoicing and risk management services for a
fee of $300,000 per month. Odyssey acts as agent on behalf of us in the
over-the-counter and New York ISO markets.




                                        6


<PAGE>


         As agent, Odyssey manages all energy transactions under our name
including (i) preparing confirmations for us and approving confirmations with
counter-parties, (ii) conducting monthly check-outs with counter-parties as
appropriate before the preparation of invoices, (iii) invoicing counter-parties
for the term of the transactions and (iv) otherwise managing and executing the
terms of the transactions in accordance with their provisions.

         Odyssey provides data management for us by maintaining databases of
pricing, load, transmission, weather and generation data to aid in analysis to
optimize the value of our assets.

         Odyssey maintains a transaction management system to manage day-ahead
commitments with the New York ISO and swap and physical values with
counter-parties and to provide daily financial reporting and end of day budget
variance, forward mark-to-market and commercially accepted risk analysis.

         New York Wholesale Electric Energy Market. Electric energy generators
may 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 New York 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 settlement systems 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 balance actual loads and resources. 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.

         In general, we sell the electric energy generated by our electricity
generating stations directly into the spot market. On occasion, we enter into
bilateral sales contracts for our electricity generating stations' electric
energy.

         Unforced Capacity Market. A market in which electricity generators can
sell commitments of their unforced generating capacity has been established to
ensure there is enough generation capacity available to produce sufficient
electric energy to meet retail demand and ancillary service requirements. Any
load serving entity is required to procure capacity commitments sufficient to
meet its capacity requirements based on its forecasted annual electric energy
requirements at times of maximum usage plus a reserve requirement. Initially,
each load serving entity is required to purchase unforced 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 unforced 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. Starting with the 2001 - 2002 Winter Capability Period, the ISO
implemented a revised capacity market design in the New York control area that
employs unforced capacity as the measure of the capacity of a generator rather
than the old measure of installed capacity. Unforced capacity factors in the
probability that a generator will be available to serve load. Unforced capacity
is the demonstrated maximum output of a generator(installed capacity) with a
formula applied that takes into account a generator's forced outage rate over a
defined period of time.




                                        7


<PAGE>


         Suppliers of unforced capacity are not required to supply the
associated electric energy to the load serving entity with whom they have a
contract to provide unforced capacity. For reliability reasons, the New York ISO
requires that electricity generators that sell unforced 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 unforced capacity into another. If the unforced
capacity supplier's offer in the electric energy market for delivery on the
following day is not accepted, the unforced 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.

         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. AES NY, L.L.C. assigned this agreement to us insofar as it
related to our electricity generating stations. The parties performance under
the agreement commenced on May 14, 1999 and terminated on April 30, 2001. Since
this agreement terminated, we have entered into bilateral contracts with a
number of parties for the substantial portion of our unforced capacity through
April 30, 2008.

         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.

         OTC Swap Market. A fairly liquid over-the-counter swap market has
developed in several of the ISO Zones, (1) West or Zone A, (2) East or Zone G,
and (3) New York City or Zone J. A zone is a defined portion of the New York
electric system that encompasses a set of load and generation buses. Each Zone
has an associated zonal price that is calculated as a weighted average price.
Currently New York State is divided into eleven zones, corresponding to ten
major transmission interfaces that can become congested. The swaps settle
against the Day Ahead LBMP for Zone A. Our plant prices are highly correlated to
the Zone A price and the swaps are highly effective products for managing our
price risk.

         Transmission System Market. Transmission lines in New York are
controlled by the ISO. Transmission access is available to all market
participants on a comparable and non-discriminatory basis. A party transmitting
electric energy through or out of New York State pays the ISO a transmission
service charge to cover the revenue requirements of the transmission owner.
Electric energy sold under a bilateral contract is subject to a congestion
charge. The congestion charge reflects the differences between the LBMP 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.

         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.




                                        8


<PAGE>


         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, ISO New England, PJM (Pennsylvania-New
Jersey-Maryland) Interconnection and eastern New York. On the export side, ISO
New England and PJM Interconnection 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 to the extent that we have sold our
installed capacity to a load serving entity in New York in accordance with the
rules of the New York ISO.

         Fuel Supply

         Our electricity generating stations are located in close proximity to
important coal producers. In addition, both Somerset and Cayuga are equipped
with flue gas desulfurization("FGD") systems allow the plant to burn less
expensive medium- and high-sulfur coal while staying within sulfur dioxide
("SO2") emission regulation requirements.

         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 FGD systems, the high sulfur content of the coals from the
Pittsburgh Seam have historically made coal-fired generating stations equipped
with FGD systems the primary market for Pittsburgh Seam producers. Since both
Somerset and Cayuga have installed FGD systems and are capable of burning higher
sulfur coals, we expect to maintain a fuel cost advantage over competitors
without FGD systems.

         Approximately 66% of Somerset's and approximately 50% of Cayuga's coal
requirements are 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.

         Greenidge and Westover rely on shorter term contracts to purchase their
medium-sulfur coal.

         The Electricity Generating Stations

         We believe that our two principal coal-fired electricity generating
stations, Somerset and Cayuga, 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. Somerset, Cayuga, Westover and Greenidge have an aggregate
net generating capacity of 1,268MW.

         The Somerset Generating Station

         Somerset 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, which
began generating electricity in 1984. The maximum net generating capacity of
Somerset is 675MW.

         Somerset currently operates at operating costs at which it can be run
economically even at times of minimum demand for electric energy. Somerset also
is capable of burning low cost medium- and high-sulfur coal as a result of being
equipped with a FGD system and a selective catalytic reduction ("SCR") system.
When Somerset 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.




                                        9


<PAGE>


         The Cayuga Generating Station

         Cayuga is located alongside the east shore of Cayuga Lake, near the
town of Lansing, New York. There are two operating units at Cayuga, Unit 1 and
Unit 2, which began generating electricity in 1955 and 1958, respectively. The
maximum aggregate net generating capacity of the two units is 306MW. Cayuga Unit
1 currently has a net generating capacity of 150MW. Unit 2 currently has a net
generating capacity of 156MW.

         Cayuga historically has been operated at operating costs at which it
can be run economically even at times of minimum demand for electric energy.
Cayuga also is capable of burning low cost medium- and high-sulfur coal as a
result of being equipped with a FGD system. When Cayuga 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 and frequency support. During 2001, we installed a SCR system on Unit
1, which became operational on June 7, 2001.

         Westover Generating Station

         Westover 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. ___ Westover presently consists of
two units, Unit 7 and Unit 8, with a combined maximum net generating capacity of
126MW.

         Westover 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 ISO power
control center and enable it to provide regulation, frequency support, and when
directed by the ISO, voltage support.

         Greenidge Generating Station

         Greenidge 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. Greenidge presently consists of
two units, Unit 3 and Unit 4, with a combined maximum net generating capacity of
161MW.

         Greenidge 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 ISO power control center
and enable it to provide regulation, frequency support, and, when directed by
the ISO, voltage support.

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.




                                       10


<PAGE>


         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 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 terminated
working capital credit facility with Union Bank of California, N.A. In April
2001, we have received approval of our current working capital facility.

         Lease Transactions Filings and Approvals. As conditions to completion
of the lease transactions relating to Somerset and Cayuga, 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.




                                       11


<PAGE>


         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, record-keeping, 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 proposed regulations to
have a material adverse effect on our operations or our financial condition.

         On February 14, 2002, the Bush Administration issued its
multi-pollutant proposal called "Clear Skies". This proposal would regulate the
emission of SO2, NOx and mercury. We have not determined the effect of the Clear
Skies or the other pending regulation or legislation.

         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 SCR system, including the construction of new landfill space to
manage ash from SCR system operations, and the construction of a SCR system on
Cayuga Unit 1, which became operational on June 7, 2001, and expenditures for
possible installation of a SCR system on Cayuga Unit 2, the U.S. Department of
Energy Power Plant Improvement project on Greenidge Unit 4 and the Westover
Overfire Air Project, 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."

         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
nitrogen oxides ("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




                                       12


<PAGE>


to comply with various monitoring and record-keeping requirements. The federal
SO2 requirements were 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
fossil-fuel fired 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 Unit 1 and Unit 2 and
Greenidge Unit 4 falling under the program. Phase II went into effect January 1,
2000 and affects all the units.

         FGD systems are operated at both Somerset and Cayuga 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 to cover SO2 emissions for Greenidge and Westover. Market prices for
SO2 allowances currently range from $157 to $175 per ton. We were self
sufficient with respect to SO2 allowances in 2001, however it is expected that
we may have a shortfall of approximately 10,000 to 13,000 SO2 allowances in 2002
assuming the units are operated at capacities similar to 2001. At current market
prices, the cost could range from $1.7 million to $2.2 million to purchase
sufficient SO2 allowances for 2002.

         On October 14, 1999, New York Governor Pataki announced a new
initiative which directs the New York State Department of Environmental
Conservation ("NYSDEC")to issue regulations requiring electric generators to
reduce SO2 emissions by another 50% below Phase II standards. The NYSDEC issued
proposed regulations in February 2002. The proposed regulations call for the new
SO2 reduction regulations to be phased in starting on January 1, 2005 with
implementation completed by January 1, 2008. If adopted, the proposed
regulations will 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 proposed regulations; however, the costs of compliance could be
substantial.

         In addition, we received an information request letter dated October
12, 1999 from the New York Attorney General which sought detailed operating and
maintenance history for Westover and Greenidge. On January 13, 2000, we received
a subpoena from the NYSDEC seeking similar operating and maintenance history for
all four of our electricity generating stations. We have provided materials
responding to the requests from the Attorney General and the NYSDEC. This
information was sought in connection with the Attorney General's and the
NYSDEC'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 proposed
regulations and the Attorney General's and the NYSDEC'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.

         On April 14, 2000 we received a request for information pursuant to
Section 114 of the Clean Air Act from the United States Environmental Protection
Agency ("EPA") seeking detailed operating and maintenance history data for
Cayuga and Somerset. EPA has commenced an industry-wide investigation of
coal-fired electric power generators to determine compliance with environmental
requirements under the Clean Air Act associated with repairs, maintenance,
modifications and operational changes made to coal-fired facilities over the
years. The EPA's focus is on whether the changes were subject to new source
review or new source performance standards, and whether best available control
technology was or should have been used. We have provided the requested
documentation and the EPA is currently evaluating the materials.

         By letter dated May 25, 2000, the NYSDEC issued a Notice of Violation
(NOV) to NYSEG for violations of the Clean Air Act and the Environmental
Conservation Law at Greenidge and Westover related to NYSEG's alleged failure to
obtain an air permitting review for repairs and improvements made during the
1980s and 1990s, which was prior to the acquisition of the electricity
generating stations by us. Pursuant to the Asset Purchase Agreement relating to
the acquisition of the electricity generating stations from NYSEG, we agreed to
assume responsibility for environmental liabilities that arose while NYSEG owned
the electricity generating stations. On September 12, 2000, we agreed with NYSEG
that we will assume the defense of and responsibility for the NOV, subject to a
reservation of our right to assert applicable exceptions to our contractual
undertaking to assume preexisting environmental liabilities. The financial and
operational effect of this NOV is still being discussed with the DEC. We are
unable to estimate the effect of this




                                       13


<PAGE>


NOV on our financial condition or results of future operations. It is possible
that the NYSDEC NOV and other potential enforcement actions arising out of the
Attorney General, NYSDEC, and EPA investigations may result in penalties and the
potential requirement to install additional air pollution control equipment and
could require us to make substantial expenditures.

         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.

         The Phase I regulations require facilities in New York State to
implement NOx control requirements based on reasonably available control
technology. Somerset, Cayuga, Greenidge and Westover operate under a common
averaging plan, whereby the 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
gives us 6,292 NOx emission allowances annually through 2002. Each allowance
authorizes 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 SCR system at Somerset which became operational in June 1999. During
2001, we installed a SCR system on Unit 1 of Cayuga, which became operational on
June 7, 2001.

         Somerset generated 2,633, 2,516 and 2,345 excess allowances in 2001,
2000 and 1999, respectively, and should continue to generate excess allowances
in 2002. Cayuga accumulated approximately 600 excess allowances on Unit 1 during
the 2001 ozone season. We expect that it will accumulate an equal number of
excess allowances during the 2002 ozone season. A portion of our compliance
strategy involves potential installation of additional NOx control technology at
our electricity generating stations, and/or the selling/buying or trading of
allowances. This includes trades between our electricity generating stations as
needed to offset NOx emissions. During 2001, we were a net seller of NOx
allowances.

         The current allowance allocations will allow each of our electricity
generating stations to run at their planned capacity factors through 2003, when
the more stringent Phase III NOX regulations are imposed. Since the final Phase
III allowance allocations have not been made, 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 SCR system at Cayuga 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 and
control technologies.

         New York Governor Pataki's October 14, 1999 initiative also directs the
NYSDEC to issue regulations requiring electric generators to impose stringent
NOx reduction requirements during the seven months not covered by the summertime
ozone season. The NYSDEC issued proposed regulations in February 2002. The
proposed regulations call for implementation the new NOx regulations to be in
effect starting on October 1, 2004.

         If adopted, the proposed regulations have 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. We are not currently in a position to quantify the potential
costs of complying with the NOx requirements of the proposed regulations;
however, the costs of compliance could be substantial.

         The capital cost of the Somerset SCR was $31 million. We expect that
the system will operate for 20 years at which time we will need to replace the
catalyst approximately every three years at an estimated cost of $4.5 million in
1999 dollars. The capital cost of the Cayuga SCR on Unit 1 was $11.2 million and
it was operational on June 7, 2001. We expect that the system will operate for
20 years with catalyst replacement capital costs of $325,000 (in 2001 dollars)
every four years.




                                       14


<PAGE>


         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.

         On October 16, 2001 Greenidge was awarded a Federal Clean Coal Grant
that will fund 50% of the capital costs and 30% of the operations and
maintenance costs for backend technology. This technology will include a single
bed, in-duct SCR unit in combination with low-NOX combustion technology, on
Greenidge Unit 4 firing on coal and biomass. It will also include a Circulating
Dry Scrubber for SO2, mercury and acid gas removal. AES Greenidge L.L.C.'s share
of the costs for the 54-month project will be approximately $9.8 million.
Westover is also in the process of installing overfire air to control NOx.

         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. This
was a common problem at coal-fired electricity generating plants, and the New
York State Department of Environmental Conservation 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 require
continued operation at the current level of opacity compliance that has been
achieved over the past year.

         In January 2000, we received a draft consent order from the NYSDEC that
alleges violations of the opacity emission limitations in the air permits for
Cayuga, Westover, and Greenidge 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 NYSDEC in 2002. AES NY, L.L.C. also
received notice from NYSEG that NYSEG has received a draft consent order from
the NYSDEC 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.

         Mercury. In 2000, the EPA determined that regulation of mercury
emissions from the nation's coal-fired power plants is necessary. The
regulations will be developed over the coming years, with a final rule scheduled
to be promulgated in December 2004, and compliance under the new rule expected
for December 2007. At this point we cannot determine what the costs would be to
comply with mercury control regulations.

         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 Bush Administration has indicated that the United States will not
implement the Kyoto Protocol. On February 14, 2002, President Bush announced his
Global Climate Change Initiative which calls on U.S. industry to commit to
voluntary greenhouse gas emission reductions and will directs the U.S.
Department of Energy to implement an improved verifiability system for the
existing voluntary emission reductions registry and the development of
transferable credits for verifiable reductions.




                                       15


<PAGE>


         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. On February 28, 2002, EPA
Administrator Whitman signed a proposed rule that would impose new requirements
on cooling water intake systems for existing power plants. If promulgated, the
regulations could require upgrades to the cooling water intake system at one or
more of our electricity generating stations to meet technology-based standards
that are intended to reduce the impact on aquatic life from impingement on
intake structure screens and entrainment in the intake system. We are not
currently in a position to quantify the potential costs of complying with the
proposed rule; however, the costs could be substantial.

         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 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, Somerset 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.

         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 contributed one-half of the closure
costs for the Weber ash disposal site based on the amount of ash disposed at the
site from Westover and Greenidge, which are owned by AEE2, L.L.C., compared to
the amount disposed from the Hickling Generating Station("Hickling") and the
Jennison Generating Station("Jennison"), which were acquired by AES Creative
Resources, L.P.

         In October 1999, AES Creative Resources, L.P. entered into a consent
order with the NYSDEC to resolve alleged violations of the water quality
standards in the groundwater downgradient of the Weber ash disposal site. The
consent order included 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 called for a site investigation, which was
conducted and indicated that there is a possibility that some groundwater
remediation at the site may be required. Further compliance with this order
included a Closure Investigation Report which was submitted to the NYSDEC in the
spring of 2000, and a Closure Plan which was submitted to the NYSDEC in January
2001.




                                       16


<PAGE>


         The Closure Plan was implemented in December 2001 when capping of the
site was completed. Minor site maintenance will be required in the spring of
2002. AEE2, L.L.C. contributed one-half of the costs to close the landfill,
which were approximately $2 million, and it will contribute additional costs for
long-term groundwater monitoring. 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.

         We expect to develop a new area, Area 3, of the on-site landfill
located at Somerset to contain ammonia-contaminated fly ash produced during
operation of the SCR system and stabilized sludge produced during simultaneous
operation of the FGD system. As designed, Area 3 will comply with modern
landfill design and performance standards. 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 NYSDEC of more detailed design submissions.
The NYSDEC has defined non-ammoniated waste material to contain less than 0.5
parts per million of ammonia. Most of the fly ash generated during operation of
the SCR at Somerset qualifies as non-ammoniated. The NYSDEC approved disposal of
non-ammoniated waste material generated during the operation of the SCR system
in an existing area of the landfill, Area 1. We are working with the NYSDEC to
complete an approved design for the Area 3 expansion. The existing Cayuga
on-site landfill currently complies with modern landfill design and performance
standards and will receive any ammonia-contaminated fly ash or ammoniated sludge
produced during operation of the SCR system on Unit 1.

         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 NYSDEC. 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. Only Area
1 was used by NYSEG. The Area 1 landfill has been expanded seven 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
NYSDEC 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.

         Natural 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 NYSDEC 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 NYSDEC 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
Somerset that we received in connection with installation of the SCR.




                                       17


<PAGE>


         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 NYSDEC, the discovery of groundwater contamination
from Area 1, and escalation of the costs of landfill development.

         Exceedences of state groundwater standards at Cayuga 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, which
brought Cayuga within state groundwater standards.

         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.

         In 2000, the EPA confirmed that ash disposed of in landfills should be
regulated as non-hazardous waste. Nevertheless, the EPA determined that
additional solid waste regulations will be developed for coal ash disposal in
landfills and surface impoundments. At this point, we cannot determine whether
such new regulations will have an impact on our ash disposal practices.

         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 Somerset 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 2001, we employed 259 people who operate our electricity
generating stations. The International Brotherhood of Electrical Workers (the
"IBEW") represents hourly labor at Somerset, Cayuga, Westover and Greenidge. The
IBEW represents approximately 240 workers. We have negotiated collective
bargaining agreements with respect to each electricity generating station, on an
individual electricity generating station basis. This gives us continuing labor
harmony and encourages the adoption of The AES Corporation's culture by
emphasizing individual businesses with responsibility and ownership of local
issues. We believe that relations with the people employed at our electricity
generating stations are satisfactory.




                                       18


<PAGE>


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 Somerset and Cayuga 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.

Item 3.  Legal Proceedings

         We received an information request letter dated October 12, 1999 from
the New York Attorney General which sought detailed operating and maintenance
history for Westover and Greenidge. On January 13, 2000, we received a subpoena
from the NYSDEC seeking similar operating and maintenance history for all four
of our electricity generating stations. We have provided materials responding to
the requests from the Attorney General and the Department of Environmental
Conservation. This information was 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.

         On April 14, 2000 we received a request for information pursuant to
Section 114 of the Clean Air Act from the EPA seeking detailed operating and
maintenance history data for Cayuga and Somerset. The EPA has commenced an
industry-wide investigation of coal-fired electric power generators to determine
compliance with environmental requirements under the Clean Air Act associated
with repairs, maintenance, modifications and operational changes made to
coal-fired facilities over the years. The EPA's focus is on whether the changes
were subject to new source review or new source performance standards, and
whether best available control technology was or should have been used. We have
provided the requested documentation and the EPA is currently evaluating the
materials.

         By letter dated May 25, 2000, the NYSDEC issued a Notice of Violation
(NOV) to NYSEG for violations of the Clean Air Act and the Environmental
Conservation Law at Greenidge and Westover related to NYSEG's alleged failure to
obtain an air permitting review for repairs and improvements made during the
1980s and 1990s, which was prior to the acquisition of the electricity
generating stations by us. Pursuant to the Asset Purchase Agreement relating to
the acquisition of the electricity generating stations from NYSEG, we agreed to
assume responsibility for environmental liabilities that arose while NYSEG owned
the electricity generating stations. On September 12, 2000, we agreed with NYSEG
that we will assume the defense of and responsibility for the NOV, subject to a
reservation of our right to assert applicable exceptions to our contractual
undertaking to assume preexisting environmental liabilities. The financial and
operational effect of this NOV is still being discussed with the NYSDEC. We are
unable to estimate the effect of this NOV on our financial condition or results
of future operations.




                                       19


<PAGE>


         It is possible that the NYSDEC NOV and other potential enforcement
actions arising out of the Attorney General, NYSDEC, and EPA investigations may
result in penalties and the potential requirement to install additional air
pollution control equipment and could require us to make substantial
expenditures.

         In January 2000, we received a draft consent order from the NYSDEC that
alleges violations of the opacity emission limitations in the air permits for
Cayuga, Westover, and Greenidge occurring since we acquired our electricity
generating stations 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 NYSDEC in 2002. AES NY, L.L.C. also
received notice from NYSEG that NYSEG has received a draft consent order from
the NYSDEC 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.










                                       20


<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,                                     2001        2000         1999
-------------------------------------------          --------    --------     --------
<S>                                                  <C>         <C>          <C>

Balance Sheet Data (in millions)
Total Assets                                         $1,194       $1,185       $1,133
Long Term Liabilities                                $  699       $  679       $  692
Partners' Capital                                    $  433       $  441       $  378

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

 For the period ending December 31,                    2001        2000         1999
-------------------------------------------          --------    ---------    --------

Statement Of Income Data (in millions)
Operating Revenue                                    $  349       $  388       $  185
Operating Income                                     $  106       $  151       $   57
Net income                                           $   52       $   98       $   24
</TABLE>



SELECTED QUARTERLY FINANCIAL DATA

     The following table summarizes the quarterly consolidated statements of
income (in thousands):

<TABLE>
<CAPTION>
                                      First     Second      Third     Fourth
                                     Quarter    Quarter    Quarter    Quarter
                                    ---------  ---------  ---------  ---------
<S>                                 <C>        <C>        <C>        <C>
YEAR ENDED DECEMBER 31, 2001:
   Operating Revenue                $111,405   $ 69,681   $ 88,657   $ 79,111
   Operating Income                   49,391     12,294     25,083     19,698
   Net income                         35,455     (1,406)    11,822      5,994

YEAR ENDED DECEMBER 31, 2000:
   Operating Revenue                $ 80,096   $ 89,613   $ 97,219   $120,638
   Operating Income                   27,183     30,745     35,403     57,958
   Net income                         12,115     15,903     24,553     45,666

PERIOD FROM MAY 14, 1999 (INCEPTION)
 TO DECEMBER 31, 1999:
   Net sales                            N/A    $ 17,225   $103,618   $ 63,725
   Gross profit                         N/A       3,141     43,628     10,269
   Net income                           N/A         578     27,730     (3,893)
</TABLE>






                                       21


<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         General

         The information in this Management's Discussion and Analysis should be
read in conjunction with the accompanying consolidated financial statements, the
related Notes to the Financial Statements and the selected financial data.
Forward looking statements in this Management's Discussion and Analysis are
qualified by the cautionary statement in the Forward Looking Statements section
of the Management's Discussion and Analysis.

         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.

         On February 19, 2002, The AES Corporation announced that it intends to
reposition itself in the electric business by fully contracting or divesting its
merchant generation businesses. The AES Corporation stated that it made this
decision to reduce earnings volatility and strengthen its balance sheet. We are
one of the merchant generating businesses. Our business could be fully
contracted if we were to sign one or more long-term power sales agreements for
the output of our electricity generating stations. As of the date of this Annual
Report on Form 10-K, no specific proposal to fully contract or divest our
operations is under consideration. We are adopting a policy of not commenting on
proposed transactions and we disclaim any obligation to provide information with
respect to proposed transactions until a definitive agreement has been reached.

         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.

         The markets for wholesale electric energy, unforced 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 by the generating assets in the region, we expect that the 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 electricity generating stations will be idle while other generating
stations are directed to run.

         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 2001, 2000 and 1999, the stations had a
weighted average (based on capacity) equivalent availability factor of 96%, 94%
and 97%, respectively (excluding the outages at the Somerset and Cayuga from May
to June 1999 and from April to June 2001, respectively). Based upon the
historical experience of The AES Corporation, we believe that we can maintain or
improve the availability of our electricity generating stations.

         We believe that we will also have opportunities to derive revenue from
sales of unforced capacity and ancillary services. Under the terms of the
capacity purchase agreement with NYSEG, NYSEG purchased all of our 1,268MW of
installed capacity at a price of $68 per MW-day through April 30, 2001. During
the term of the capacity purchase agreement, the rules of the New York ISO
system required us to offer to sell our electric energy in the New York market
for delivery of electric energy on the following day. Since termination of the
capacity purchase agreement with NYSEG on April 30, 2001, we are permitted to
sell electric energy and unforced capacity into other markets. See
"Business--New York Power Market."




                                       22


<PAGE>


         NYSEG has brought a proceeding to obtain a refund of real estate taxes
it paid in connection with Somerset 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.

Significant Accounting Policies

         General

         We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments and assumptions that
we believe are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies which
we believe are most critical to understanding and evaluating our reported
financial results include the following: Revenue Recognition; Property, Plant
and Equipment, Contingencies and Derivatives.

         Revenue Recognition

         Revenues from the sale of electricity are recorded based upon output
delivered and rates specified under contract terms. Revenues generated from
commodity forwards, swaps and options, which are entered into for the hedging of
forecasted sales, are recorded based on settlement accounting with the net
amount received recognized as revenue. Revenues for ancillary and other services
are recorded when the services are rendered.

         Property, Plant and Equipment

         Electric generation assets that existed at the date of acquisition (see
Note 3) are recorded at fair market value. Somerset and Cayuga, 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 Somerset and
Cayuga, respectively, and over the estimated useful lives for the other fixed
assets, which range from 7 to 35 years. A significant decrease in the estimated
useful life of a material amount of our property, plant or equipment could have
a material adverse impact on our operating results in the period in which the
estimate is revised and subsequent periods. Maintenance and repairs are charged
to expense as incurred.

         Contingencies

         We accrue for loss contingencies when the amount of the loss is
probable and estimable. We are subject to various environmental regulations, and
we are involved in certain legal proceedings. If our actual environmental and/or
legal obligations are materially different from our estimates, the recognition
of the actual amounts may have a material impact on our operating results and
financial condition.

         Derivatives

         On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended, established new
accounting and reporting standards for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives (including derivatives
embedded in other contracts) be recorded as either assets or liabilities at fair
value on the balance sheet. Changes in the derivative's fair value are to be
recognized in earnings in the period of change, unless hedge accounting criteria
are met. Hedge accounting allows the derivative's gains or losses in fair value
to offset the related results of the hedged item. We utilize derivative
financial instruments to manage commodity price risk. Although the




                                       23


<PAGE>


majority of our derivative instruments qualify for hedge accounting, the
adoption of SFAS No. 133 will result in more variation to our results of
operations from changes in commodity prices. For the year ended December 31,
2001, we recognized $29.5 million of losses pursuant to SFAS No. 133 related to
derivatives which did not qualify for hedge accounting. See Note 7 to the
consolidated financial statements for a more complete discussion of the
accounting for derivatives under SFAS No. 133.


        Results of Operations
         ---------------------
        (Amounts in Millions)
<TABLE>
<CAPTION>
                                                                   %                   %
For the Year Ended December 31,                2001     2000     Change     1999     Change
                                              ------   ------   --------   ------   --------
<S>                                           <C>      <C>      <C>        <C>      <C>
Energy Revenue                                $378.3   $322.7     17.2     $162.9     98.1

Capacity Revenue                                26.8     31.6    (15.2)      17.9     76.5

Transmission Congestion Contract                 -       24.9       -         -        -

Other                                            6.2      8.5    (27.1)       3.8    123.7
</TABLE>


         The increase in Energy Revenues from 2000 to 2001 is primarily due to
higher market prices in the first half of the year and higher operating levels
during that time. These were offset by a major maintenance outage at Cayuga of
approximately 45 days for Unit 1 in 2001. We scheduled this outage to avoid
expected seasonal peaks in demand for electric energy. The increase in Energy
Revenue in the year ended December 31, 2000 compared to the period from May 14,
1999 (inception) to December 31, 1999 was primarily due to a full year of
operations combined with higher energy prices.

         The decrease in Capacity Revenue from 2000 to 2001 is primarily due to
the expiration of a long term capacity purchase agreement with NYSEG in April
2001. Capacity sales on the open market for the remainder of the 2001 period
were at lower rates. The increase in Capacity Revenue in the year ended December
31, 2000 compared to the period from May 14, 1999 (inception) to December 31,
1999 was due to a full year of operations.

         The Transmission Congestion Contract is essentially a swap between the
congestion component of the locational prices posted by the New York ISO in
western New York and the more populated areas in eastern New York. The
Transmission Congestion Contract became effective on November 1, 2000 and
terminates on October 1, 2004. We entered into this agreement because it
provided a reasonable settlement for resolving a FERC dispute between us and
Niagara Mohawk Power Corporation. This contract is not deemed to be a hedge
based on the definitions in SFAS 133. Therefore, this contract is marked to
market at the end of every period. The mark-to-market value is computed based on
a regression of historical eastern and western locational prices. This
regression is used with forecasted eastern and western locational prices to
calculate the forward congestion for the remainder of the contract term. This
accounting treatment contributes to the income statement volatility of this
contract.

<TABLE>
<CAPTION>
Operating Expenses
--------------------                                               %                  %
For the Year Ended December 31,                2001     2000     Change     1999    Change
                                              ------   ------   --------   ------   ------
<S>                                           <C>      <C>      <C>        <C>      <C>
Fuel expense                                  $135.6   $131.7     3.0      $ 70.7    86.3

Depreciation and amortization                   33.5     31.7     5.7        17.4    82.2

Operations and maintenance                      19.6     16.8    16.7         7.6   121.1

General and administrative                      53.7     56.1    (4.3)       31.8    76.4

Transmission Congestion Contract and
  derivative valuation                          29.5       -       -           -       -
</TABLE>




                                       24


<PAGE>


         The increase in Operating Expenses from 2000 to 2001 is primarily due
to higher operating levels in the first half of the year, which necessitated
greater coal usage, greater coal purchases on the spot market and higher
operating and maintenance expenditures. These increases were partially offset by
the decrease in general and administrative expenses. The increase in Operating
Expenses in the year ended December 31, 2000 and the period from May 14, 1999
(inception) to December 31, 1999 was due to a full year of operations. In
addition, Somerset incurred fixed charges during 2000 with respect to the
Niagara Mohawk Power Corporation transmission agreement of $6.1 million.

<TABLE>
<CAPTION>
Other Expenses
--------------------                                                %                 %
For the Year Ended December 31,                 2001     2000     Change    1999    Change
                                               ------   ------   -------   ------   ------
<S>                                            <C>      <C>      <C>       <C>      <C>
Interest expense                               $58.4    $57.3      1.9     $33.7     70.0

Interest Income                                  3.8      4.3    (11.6)      1.1    290.9
</TABLE>


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

         Liquidity and Capital Resources

         The leases for Somerset and Cayuga 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 Somerset
and Cayuga 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 is $62.6 million for 2002, $57.6 million for 2003, $63.5
million for 2004, $59.5 million for 2005, $61.6 million for 2006 and a total of
$1,314.7 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 note 6 of 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. At December 31, 2001, 2000 and 1999, the amounts deposited in
the rent reserve account were $31.7 million, $31.0 million and $29.5 million,
respectively.

         We will also be obligated to make payments under the coal hauling
agreement with 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. On August 14, 2000, Somerset Railroad
entered into a $26 million credit facility with Fortis Capital Corp. which
replaced in its entirety a credit facility for the same amount previously
provided to Somerset Railroad by an affiliate of CIBC World Markets. The new
credit facility provided by Fortis Capital Corp. consists of a 14-year term note
(maturing on May 6, 2014), with principal and interest payments due quarterly.
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, payments under
our working capital facility and payments under the coal hauling agreement with
Somerset Railroad, which in turn allow Somerset Railroad to pay principal and
interest under its credit facility with Fortis Capital Corp.




                                       25


<PAGE>


         We incurred approximately $17.1 million, $20.7 million and $64.2
million in capital expenditures with regard to our assets for the years ended
December 31, 2001, 2000 and 1999, respectively. These amounts include
approximately $11.2 million for a SCR system to reduce NOx emissions at Cayuga
which was operational June 7, 2001. We will make capital expenditures thereafter
according to the maintenance program for our electricity generating stations. 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 the SCRs at
Somerset and Cayuga, including the construction of new landfill space to manage
ash from Somerset's SCR system operations, and the construction of a SCR system
on Cayuga Unit 1, which became operational on June 7, 2001, and expenditures for
possible installation of a SCR system on Cayuga Unit 2, the U.S. Department of
Energy Power Plant Improvement project on Greenridge Unit 4 and the Westover
Overfire Air Project, 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, 2001, 2000 and 1999 was $80.0
million, $84.2 million and $46.8 million, respectively. During 1999 and 2000, we
made two borrowings under a Credit Suisse First Boston working capital credit
facility. The first 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
second borrowing was from July 18, 2000 to July 25, 2000 in the amount of $8
million and bore interest at the rate of 8.375% per annum. At March 9, 2001, our
$20 million Credit Suisse First Boston working capital credit facility was
terminated. In April 2001, we entered into a $35 million secured revolving
working capital and letter of credit facility with Union Bank of California,
N.A. This facility has a term of approximately twenty-one months. We can borrow
up to $35 million for working capital purposes under this facility. In addition,
we can have letters of credit issued under this facility up to $25 million,
provided that the total amount of working capital borrowings and letters of
credit issuances may not exceed the $35 million limit on the entire facility.
Since the new facility was signed there have been two borrowings. The first
borrowing was for $7 million on July 13, 2001 at an interest rate of 8.125%. The
borrowing was repaid on July 31, 2001. The second borrowing was for $8.5 million
on January 11, 2002 at an interest rate of 6.125%. The borrowing was repaid in
full on February 28, 2002.

         The outage at Cayuga for almost the entire period from March 31, 2001
to June 4, 2001 did not impair our ability to meet our obligations during this
period. Similarly, the outage at Somerset 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 these outages, 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 Somerset and Cayuga on the rent payment dates of
January 2, 2000, July 2, 2000, January 2 2001, July 2, 2001 and January 2, 2002.
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 $35 million working capital and letter of credit facility with Union Bank of
California, N.A., 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.

         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 Somerset and Cayuga. 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.




                                       26


<PAGE>


         Our ability to make distributions to the partners of our company is
restricted by the terms of the agreements governing the leases for Somerset and
Cayuga. We may make distributions only on or within ten 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. See "Business--General Development of
Business."

         The AES Corporation contributed approximately $9.3 million to us in
2001. The contribution was accounted for as a partner's contribution and was
related to the construction of the SCR on Unit 1 of Cayuga, which became
operational on June 7, 2001.

              Credit Rating Discussion

         Credit ratings affect our ability to execute our commercial strategies
in a cost-effective manner. In determining our credit rating, the rating
agencies consider a number of factors. Quantitative factors that appear to have
significant weight include, among other things, earnings before interest, taxes
and depreciation and amortization ("EBITDA"); operating cash flow; total debt
outstanding; fixed charges such as interest expense, lease payments; liquidity
needs and availability and various ratios calculated from these factors.
Qualitative factors appear to include, among other things, predictability of
cash flows, business strategy, industry position and contingencies.

              Trigger Events

         Our commercial agreements typically include adequate assurance
provisions relating to trade credit and some agreements have credit rating
triggers. These trigger events typically would give counterparties the right to
suspend or terminate credit if our credit ratings were downgraded. Under such
circumstances, we would need to post collateral to continue transacting
risk-management business with many of our counterparties under either adequate
assurance or specific credit rating trigger clauses. The cost of posting
collateral would have a negative effect on our profitability. If such collateral
was not posted, our ability to continue transacting business as before the
downgrade would be impaired.

              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.







                                       27


<PAGE>


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

         We are exposed to market risks associated with commodity prices. We
often utilize financial instruments to hedge against such fluctuations. We
utilize financial and commodity derivatives for the purpose of hedging exposures
to market risk. We generally do not enter into derivative instruments for
trading or speculative purposes.

         We are exposed to the impact of market fluctuations in the price of
electricity and coal. Our current and expected future revenues are derived from
wholesale energy sales without significant long-term revenue or supply
contracts. Our results of operations are subject to the volatility of
electricity and coal prices in competitive markets. We hedge certain aspects of
our "net open" positions. We have used a hedging strategy, where appropriate, to
hedge our financial performance against the effects of fluctuations in energy
commodity prices. The implementation of this strategy involves the use of
commodity forward contracts, swaps and options.

         In 2000, we adopted a value at risk (VaR) approach to assess and manage
risk. VaR measures the potential loss in a portfolio's value due to market
volatility, over a specified time horizon, stated with a specific degree of
probability. The quantification of market risk using VaR provides a consistent
measure of risk across diverse markets and instruments. The VaR approach was
adopted because we feel that statistical models of risk measurement, such as
VaR, provide an objective, independent assessment of our risk exposure. The use
of VaR requires a number of key assumptions, including the selection of a
confidence level for expected losses, the holding period for liquidation and the
treatment of risks outside the VaR methodology, including liquidity risk and
event risk. VaR, therefore, is not necessarily indicative of actual results that
may occur.

         The use of VaR allows us to compare risk on a consistent basis and
identify the drivers of risk. Because of the inherent limitations of VaR,
including those specific to the variance/covariance approach, specifically the
assumption that values or returns are normally distributed, we rely on VaR as
only one component in our risk assessment process. In addition to using VaR
measures, we perform stress and scenario analyses to estimate the economic
impact of market changes on the value of our portfolios. These results are used
to supplement the VaR methodology.

         We perform our VaR calculation using a model based on the
variance/covariance methodology with a delta gamma model for optionality. We
express VaR as a dollar amount of the potential loss in the fair value of our
portfolio based on a 95% confidence level and a one-day holding period. Our
daily VaR for commodity price sensitive instruments as of December 31, 2001,
2000 and 1999 was $6.2 million, $5.5 million and $2.4 million, respectively.
These amounts include the financial instruments that serve as hedges and do not
include the underlying physical assets. During 2001, the daily VaR amount was
greater than the year-end amount on June 29, 2001 and September 28, 2001. At no
date during 2000 or 1999 was the daily VaR amount greater than it was at
year-end.

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 Sheets as of December 31, 2001 and 2000
         Consolidated Statements of Income for the years ended December 31, 2001
         and 2000 and for the period from May 14, 1999 (inception) through
         December 31, 1999 Consolidated Statements of Changes in Partners'
         Capital for the years ended December 31, 2001 and 2000 and for the
         period from May 14, 1999 (inception) through December 31, 1999
         Consolidated Statements of Cash Flows for the years ended December 31,
         2001 and 2000 and for the period from May 14, 1999 (inception) through
         December 31, 1999 Notes to Consolidated Financial Statements




                                       28


<PAGE>


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

Independent Auditors' Report

Financial Statements:

         Consolidated Balance Sheets as of December 31, 2001 and 2000
         Notes to Consolidated Balance Sheets

*    The Consolidated Balance Sheets 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.

                                    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 28, 2002.

         Name                      Age      Position

         Dan Rothaupt              50       General Manager
         John Ruggirello           51       Assistant General Manager
         Richard Santoroski        37       Manager of Marketing
         Kevin Pierce              44       Somerset Plant Manager
         Jerry Goodenough          37       Cayuga Plant Manager
         James Mulligan            53       Westover Plant Manager
         Douglas Roll              46       Greenidge Plant Manager

         Dan Rothaupt, our management team leader, is a Vice President of The
AES Corporation and 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 11 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
22 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.




                                       29


<PAGE>


         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.

         Kevin Pierce has over 21 years experience in power operations and has
worked for The AES Corporation for 13 years. Mr. Pierce was formerly the plant
manager for AES Hawaii, which reliably supplies twenty percent of the electric
demand for the island of Oahu and was involved with the start-up and operations
of the AES Thames plant. Mr. Pierce is the plant manager of Somerset. Mr. Pierce
has a Bachelor of Science degree in Marine Engineering from Maine Maritime
Academy.

         Jerry Goodenough has worked for The AES Corporation for three years.
Prior to that time he worked for NYSEG for ten years in engineering and
supervisory roles in the generation engineering group and at Cayuga. Mr.
Goodenough is the plant manager of Cayuga. Mr. Goodenough holds a Bachelor of
Arts degree in Physics from Ithaca College and a Master of Science degree in
Electrical Engineering from the State University of New York at Binghamton.

         James Mulligan has over 26 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 Cayuga. 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 Westover. Mr. Mulligan has a
Bachelor of Science degree in Mechanical Engineering from the New York Institute
of Technology.

         Douglas J. Roll has over 18 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 Greenidge. 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,
Roger Naill, Barry J. Sharp 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.

         Dr. Roger F. Naill, 53 years old, has been Vice President for Planning
at The AES Corporation since 1981. Prior to joining The AES Corporation, Dr.
Naill was Director of the Office of Analytical Services at the U.S. Department
of Energy.

         Barry J. Sharp, 42 years old, was appointed Chief Operating Officer of
The AES Corporation in February 2002 and oversees the finance function at The
AES Corporation as well as the large utilities business segment. He was
appointed Executive Vice President of The AES Corporation in February 2001. Mr.
Sharp was appointed Senior Vice President and Chief Financial Officer of The AES
Corporation effective January 1998 and had been Vice President and Chief
Financial Officer of The AES Corporation since 1987. He also served as Secretary
of The AES Corporation until February 1996. From 1986 to 1987, he served as The
AES Corporation's Director of Finance and Administration. Mr. Sharp is a
certified public accountant.




                                       30


<PAGE>


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

      Financial Statements:

              Consolidated Balance Sheets as of December 31, 2001 and 2000
              Consolidated Statements of Income for the years ended December 31,
              2001 and 2000 and the period from May 14, 1999 (inception) through
              December 31, 1999
              Consolidated Statements of Changes in Partners' Capital for the
              years ended December 31, 2001 and 2000 and the period from May 14,
              1999 (inception) through December 31, 1999
              Consolidated Statements of Cash Flows for the years ended December
              31, 2001 and 2000 and the period from May 14, 1999 (inception)
              through 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 Sheets as of December 31, 2001 and 2000
              Notes to Consolidated Balance Sheets

     *   The Consolidated Balance Sheets 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.






                                       31


<PAGE>


     (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*

         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*




                                       32


<PAGE>


         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                  [Reserved]

         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                  [Reserved]

         4.13                  [Reserved]

         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,




                                       33


<PAGE>


                               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*

         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                 [Reserved]

         10.16                 Kintigh Turbine Agreement among NGE, NYSEG and
                               AES Eastern Energy L.P. dated 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*




                                       34


<PAGE>


         10.19                 Amended and Restated Deposit and Disbursement
                               Agreement among AEE, Union Bank of California,
                               N.A., as Agent under the Working Capital
                               Facility, as Working Capital Provider, and
                               Bankers Trust Company, as Depositary Agent, et
                               al., dated as of April 10, 2001.**

         10.20                 [Reserved]

         10.21a                Omnibus Amendment to Kintigh A-1 Transaction
                               Documents dated as of December 1, 2000

         10.21b                Schedule identifying substantially identical
                               agreements to Omnibus Agreement constituting
                               Exhibit 10.21a hereto

         10.22a                Omnibus Amendment to Milliken A-1 Transaction
                               Documents dated as of December 1, 2000

         10.22b                Schedule identifying substantially identical
                               agreements to Omnibus Agreement constituting
                               Exhibit 10.22a hereto

         10.23a                Agreement and Appendix A dated as of April 10,
                               2001**

         10.23b                Schedule identifying substantially identical
                               agreements to Second Amendment constituting
                               Exhibit 10.23a hereto**

         10.24a                Second Amendment to Milliken A-1 Participation
                               Agreement and Appendix A dated as of April 10,
                               2001**

         10.24b                Schedule identifying substantially identical
                               agreements to Second Amendment constituting
                               Exhibit 10.24a hereto**

         10.25a                $35,000,000 Credit Agreement dated as of April
                               10, 2001 among AEE and Union Bank of California,
                               N.A., as Agent**

         10.25b                Amendment No. 1 and Waiver dated as of August 31,
                               2001 to $35,000,000 Credit Agreement dated as of
                               April 10, 2001 among AEE and Union Bank of
                               California, N.A., as Agent**

         12.1                  Statement regarding ratio of earnings to fixed
                               charges

         21.1                  Subsidiaries Schedule*

         24.1                  Power of Attorney

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

*        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.

**       Incorporated herein by reference to similarly numbered exhibit to the
         Quarterly Report of AES Eastern Energy, L.P. (Reg. No. 333-89725) for
         the quarterly period ended September 30, 2001, filed with the
         Securities and Exchange Commission on November 14, 2001.




                                       35


<PAGE>


(b)  Reports on Form 8-K.

         No reports on Form 8-K have been filed during the last quarter of our
fiscal year ended December 31, 2001.

                                   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 29, 2002

                                   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 29, 2002
---------------------   and Class A Director of AES NY, L.L.C.
Dan Rothaupt

/s/ Barry J. Sharp      Class A Director of AES NY, L.L.C.       March 29, 2002
---------------------
Barry J. Sharp

/s/ Roger F. Naill
---------------------
Roger F. Naill          Class A Director of AES NY, L.L.C.       March 29, 2002

/s/ Amy Conley          Vice President and Treasurer             March 29, 2002
---------------------   (principal financial officer)
Amy Conley              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.






                                       36


<PAGE>


                          Index to Financial Statements

                                                                            Page
AES EASTERN ENERGY, L.P.

Independent Auditors' Report ........................................         1

Financial Statements:

   Consolidated Balance Sheets.......................................         2

   Consolidated Statements of Income.................................         3

   Consolidated Statements of Changes in Partners' Capital...........         4

   Consolidated Statements of Cash Flows.............................         5

   Notes to Consolidated Financial Statements .......................         6

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

Independent Auditors' Report ........................................        18

Financial Statements:

   Consolidated Balance Sheets........................................       19

   Notes to Consolidated Balance Sheets...............................       20



*The Consolidated Balance Sheets 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.




<PAGE>


INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying consolidated balance sheets of AES Eastern
Energy, L.P. (an indirect wholly owned subsidiary of The AES Corporation) and
subsidiaries (the Partnership) as of December 31, 2001 and 2000, and the related
consolidated statements of income, changes in partners' capital, and cash flows
for the years then ended and 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 audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform our audits 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 audits provide 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, 2001 and 2000, and the results of their
operations and their cash flows for the years ended December 31, 2001 and 2000,
and the period from May 14, 1999 (inception) through December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.

/s/Deloitte & Touche LLP



McLean, Virginia
February 19, 2002




<PAGE>


                            AES EASTERN ENERGY, L.P.
                          CONSOLIDATED BALANCE SHEETS,
                     DECEMBER 31, 2001 and DECEMBER 31, 2000
<TABLE>
<CAPTION>
(Amounts in Thousands)
---------------------------------------------------------------------------------------------
December 31,                                                          2001             2000
                                                                     ------           ------
<S>                                                            <C>              <C>
ASSETS
Current Assets:
     Restricted cash:
        Operating - cash and cash equivalents                  $      4,193     $      9,924
        Revenue account                                              71,606           73,141
     Accounts receivable - trade                                     27,590           33,799
     Accounts receivable - affiliates                                   319              571
     Accounts receivable - other                                      2,123            2,170
     Inventory                                                       29,615           23,308
     Prepaid expenses                                                 6,464            6,152
                                                               -------------    -------------
          Total current assets                                      141,910          149,065
                                                               -------------    -------------
PROPERTY, PLANT, EQUIPMENT, AND RELATED ASSETS:
     Land                                                             6,884            6,877
     Electric generation assets -net of
       accumulated depreciation of $62,623 and $36,749              732,278          740,909
     Other Intangible assets -net of accumulated
       amortization of $19,941 and $12,273                          225,864          232,480
                                                               -------------    -------------
          Total property, plant, equipment and related assets       965,026          980,266
                                                               -------------    -------------
OTHER ASSETS:
     Derivative valuation                                            55,182               -
     Transmission Congestion Contract                                 -               24,851
     Rent reserve account                                            31,719           30,978
                                                               -------------    -------------
TOTAL ASSETS                                                    $ 1,193,837     $  1,185,160
                                                               =============    =============

LIABILITIES AND PARTNERS' CAPITAL

CURRENT LIABILITIES:
     Accounts payable                                          $      1,663     $      1,432
     Lease financing - current                                        6,223            1,813
     Environmental remediation                                          155            1,000
     Accrued interest expense                                        28,353           29,472
     Due to The AES Corporation and affiliates                        6,414            8,604
     Other accrued expenses                                          14,397           17,524
     Other liabilities                                                4,629            5,020
                                                               -------------    -------------
          Total current liabilities                                  61,834           64,865
                                                               -------------    -------------

LONG-TERM LIABILITIES:
     Lease financing - long term                                    639,326          645,549
     Environmental remediation                                       11,442           11,240
     Defined benefit plan obligation                                 16,968           18,781
     Derivative valuation liability                                  26,665             -
     Transmission congestion contract                                 3,506             -
     Other liabilities                                                1,057            3,267
                                                               -------------     ------------
          Total long-term liabilities                               698,964          678,837
                                                               -------------     ------------
TOTAL LIABILITIES                                                   760,798          743,702

COMMITMENTS AND CONTINGENCIES (Note 7)

PARTNERS' CAPITAL                                                   433,039          441,458
                                                               -------------    -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                        $  1,193,837     $  1,185,160
                                                               =============    =============
</TABLE>


     The notes are an integral part of the consolidated financial statements




                                        2


<PAGE>


                            AES EASTERN ENERGY, L.P.
                        CONSOLIDATED STATEMENTS OF INCOME
       YEAR ENDED DECEMBER 31, 2001, YEAR ENDED DECEMBER 31, 2000, AND THE
         PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
(Amounts in Thousands)
--------------------------------------------------------------------------------------------------------
                                                                                         Period from
                                                                                         May 14, 1999
                                                 Year ended         Year ended       (Inception) through
                                              December 31, 2001   December 31, 2000    December 31, 2000
                                              -----------------   -----------------   ------------------
<S>                                           <C>                 <C>                 <C>

OPERATING REVENUES:
     Energy                                       $345,410            $322,677             $162,854
     Capacity                                       26,767              31,572               17,927
     Transmission Congestion Contract                 -                 24,851                 -
     Other                                           6,171               8,466                3,787
                                                 ---------           ---------            ---------

          Total revenues                           378,348             387,566              184,568
                                                 ---------           ---------            ---------
OPERATING EXPENSES:
     Fuel                                          135,562             131,681               70,718
     Depreciation and amortization                  33,542              31,723               17,389
     Operating and maintenance                      19,572              16,761                7,639
     General and administrative                     53,712              56,112               31,784
     Transmission Congestion Contract
       and derivative valuation                     29,521                -                    -
                                                 ---------            --------            ---------

          Total operating expenses                 271,909             236,277              127,530
                                                 ---------            --------            ---------

OPERATING INCOME                                   106,439             151,289               57,038
                                                 ---------            --------            ---------

OTHER INCOME (EXPENSE):
     Interest expense                              (58,434)            (57,314)             (33,719)
     Interest income                                 3,860               4,262                1,096
                                                 ---------           ---------            ---------

          Total other income (expense)             (54,574)            (53,052)             (32,623)
                                                 ---------            --------            ---------

NET INCOME                                        $ 51,865            $ 98,237             $ 24,415
                                                 =========            ========            =========
</TABLE>



     The notes are an integral part of the consolidated financial statements




                                        3


<PAGE>


                            AES EASTERN ENERGY, L.P.
             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
       YEAR ENDED DECEMBER 31, 2001, YEAR ENDED DECEMBER 31, 2000, AND THE
         PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999

<TABLE>
<CAPTION>
(Amounts in Thousands)
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                Accumulated
                                                                                                   Other
                                                           General    Limited                  Comprehensive    Comprehensive
                                                           Partner    Partner      Total          Income            Income
<S>                                                       <C>        <C>          <C>         <C>               <C>

BALANCE, MAY 14, 1999 (INCEPTION)                            -            -            -

     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                                               244        24,171      24,415
                                                          --------   ----------   ---------

BALANCE, DECEMBER 31, 1999                                  3,782       374,439     378,221

     Net income                                               982        97,255      98,237

     Dividends paid                                          (350)      (34,650)    (35,000)
                                                          --------   ----------   ---------

BALANCE, DECEMBER 31, 2000                                  4,414       437,044     441,458

     Partners' Contribution, See Note 8                        94         9,278       9,372

     Net income                                               519        51,346      51,865                         51,865

     Dividends paid                                          (982)      (97,218)    (98,200)

     Transition adjustment on January 1, 2001                (663)      (65,671)    (66,334)      (66,334)         (66,334)

     Accumulated other comprehensive income                   949        93,929      94,878        94,878           94,878
                                                          --------   ----------   ---------     ---------        ---------
     Comprehensive Income                                                                          28,544           80,409
                                                                                                =========        =========
BALANCE, DECEMBER 31, 2001                                  4,331       428,708     433,039
                                                          ========   ==========   =========
</TABLE>



    The notes are an integral part of the consolidated financial statements.




                                        4


<PAGE>


                            AES EASTERN ENERGY, L.P.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
       YEAR ENDED DECEMBER 31, 2001, YEAR ENDED DECEMBER 31, 2000, AND THE
         PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999

<TABLE>
<CAPTION>
(Amounts in Thousands)
--------------------------------------------------------------------------------------------------------------

                                                                                               Period From
                                                                                               May 14, 1999
                                                        Year ended          Year ended      (Inception) through
                                                    December 31, 2001   December 31, 2000    December 31, 1999
                                                    -----------------   -----------------   -------------------
<S>                                                 <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net Income                                             $  51,865           $  98,237        $  24,415
     Adjustments to reconcile net income to
      Net cash used in operating activities:
       Depreciation and amortization                           33,542              31,723           17,389
       Realized Loss(gain) on transmission
        congestion contract                                    28,385             (24,851)            -
       Net defined benefit plan cost                            1,389              (2,989)           1,479
       Payments to pension plan                                (3,202)             (2,110)             -
     Changes in current assets and liabilities:
       Accounts receivable                                      6,508             (13,466)         (23,074)
       Inventory                                               (6,307)              4,681           (5,055)
       Prepaid expenses                                          (312)                 37           (6,189)
       Accounts payable                                           231                 924              508
       Accrued interest expense                                (1,119)             (8,988)          33,719
       Due to AES Corporation and affiliates                   (2,190)              5,354              -
       Other liabilities                                       (3,127)             (2,817)           2,687
       Other accrued expenses                                  (3,245)              4,529           12,995
                                                             ---------           ---------        ---------

          Net cash provided by operating activities           102,418              90,264           58,874
                                                             ---------           ---------        ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquistion of assets at inception date                      -                   -            (267,424)
     Payments for capital additions                           (17,148)            (20,763)         (64,223)
     Decrease(increase) in restricted cash                      7,266             (30,428)         (52,637)
     Net change in rent reserve account                          (741)             (1,435)            (870)
                                                             ---------           ---------        ---------

          Net cash used in investing activities               (10,623)            (52,626)        (385,154)
                                                             ---------           ---------        ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Cash capital contributions                                  -                   -             354,953
     Dividends paid                                           (98,200)            (35,000)            -
     Payments for deferred financing                           (1,154)               -                -
     Principal payments on lease obligations                   (1,813)             (2,638)         (28,673)
     Partner's Contribution                                     9,372                -                -
                                                             ---------           ---------        ---------

          Net cash (used in) provided by financing activities (91,795)            (37,638)         326,280
                                                             ---------           ---------        ---------

CHANGE IN CASH AND CASH EQUIVALENTS                               -                  -                -

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                    -                  -                -
                                                             ---------           ---------        ---------

CASH AND CASH EQUIVALENTS, END OF PERIOD                     $    -             $    -           $
-
                                                             =========           =========        =========



Supplemental Disclosure of Cash Flow Information:

Interest paid                                                $ 56,610           $  59,637        $    -
                                                             =========           =========        =========
</TABLE>



    The notes are an integral part of the consolidated financial statements.




                                        5


<PAGE>


                            AES EASTERN ENERGY, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       YEAR ENDED DECEMBER 31, 2001, YEAR ENDED DECEMBER 31, 2000, AND THE
         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 (AES). 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
     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 unforced capacity and
     ancillary services, directly into the markets operated by the New York
     Independent System Operator (ISO) system, PJM (Pennsylvania, New Jersey,
     Maryland) Interconnection and ISO New England. 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.

     At the time the Partnership acquired the Plants, the Partnership had
     entered into a two-year agreement for energy marketing services with
     Merchant Energy Group of the Americas, Inc. (MEGA), which was then an
     Annapolis, Maryland-based subsidiary of Gener S.A., but which has since
     been sold. MEGA was responsible for marketing the Partnership's electric
     energy, installed capacity, and ancillary services in the deregulated New
     York power market. The marketing agreement between the Partnership and MEGA
     was terminated effective November 26, 2000. The Partnership has paid MEGA
     $1.6 million and made the first of four additional payments of $225,000
     each, from 2002 to 2005, as part of the termination of the agreement with
     MEGA. Gener S.A. subsequently became a direct wholly owned subsidiary of
     AES.

     The Partnership entered into an arrangement with AES Odyssey,
     L.L.C.(Odyssey), a direct wholly owned subsidiary of AES. This agreement
     commenced on November 27, 2000 and is for a term of three years. Odyssey
     will provide data management, marketing, scheduling, invoicing and risk
     management services for a fee of $300,000 per month (see note 8).

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.

     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 Bankers Trust Company, as depositary agent.
     On request of the Partnership 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 is not permitted under the terms of the lease
     documents. Amendments, modifications or reallocations of the annual
     operating budget that result in changes of 25% (positive or negative) in
     the amounts set forth in the annual operating budget require confirmation
     from an independent engineer that such payment is based on reasonable
     assumptions.



                                        6


<PAGE>


     Inventory - Inventory is valued at the lower of cost (average cost basis)
     or market, and consists of coal and other raw materials used in generating
     electricity, and spare parts, materials, and supplies.

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

                                                  2001        2000
                                               ----------  ----------
        Coal and other raw materials           $  13,488   $   7,353
        Spare parts, materials, and supplies      16,127      15,955
                                               ----------  ----------

        Total                                  $  29,615   $  23,308
                                               ==========  ==========

     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 consisted of the
     following (in thousands):

                                                          2001      2000
                                                        --------  --------
         Electric generation tangible assets            $794,901  $777,658
         Other intangible assets                         245,805   244,753
         Accumulated depreciation and amortization      (82,564)   (49,022)
                                                        --------  --------

         Total                                          $958,142  $973,389
                                                        ========  ========

     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).

     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, 2001 and 2000, 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,
     2001, 2000, and 1999 were approximately $1.5 million, $1.4 million and
     $870,000, respectively, and are included in the rent reserve account
     balance. At December 31, 2001 and 2000, 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
     sheets, as it can only be utilized to satisfy lease obligations.




                                        7


<PAGE>


     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.

     New York Transition Agreement - As the New York ISO system represents a
     deregulated environment, the ISO attempts to ensure stability of the power
     grid in New York by requiring each entity engaged in retail sales of
     electricity to obtain unforced 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 sold 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 recognized
     revenue under this contract as it was earned, which was $68 per MW per day
     for installed capacity made available. This agreement expired on April 30,
     2001.

     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.

     Use of Estimates - The preparation of financial statements in conformity
     with accounting principles generally accepted in the United States of
     America 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. As of December 31, 2001, the Partnership has recorded
     $28.5 million of other comprehensive income due to the adoption of SFAS No.
     133, "Accounting for Derivative Instruments and Hedging Activities". In the
     years prior to the adoption of SFAS No. 133, the Partnership did not have
     any items of other comprehensive income.

     New Accounting Pronouncements - On January 1, 2001, the Partnership adopted
     SFAS No. 133, "Accounting for Derivative Instruments and Hedging
     Activities", which, as amended, established new accounting and reporting
     standards for derivative instruments and hedging activities. The Statement
     requires that the Partnership recognize all derivatives, as defined in the
     Statement, on the balance sheet at fair value. Derivatives, or any portion
     thereof, that are not effective hedges are adjusted to fair value through
     income. Derivatives that are effective hedges are recognized in other
     comprehensive income (loss) until the hedged items are recognized in
     earnings. The adoption of SFAS No. 133 on January 1, 2001, resulted in a
     cumulative reduction of Other Comprehensive Income in Partner's Capital of
     $66.3 million.

     The Partnership utilizes derivative financial instruments to hedge
     commodity price risk. The Partnership utilizes electric derivative
     instruments, including swaps and forwards, to hedge the risk related to
     forecasted electricity sales over the next four years. The majority of the
     Partnership's electric derivatives are designated and qualify as cash flow
     hedges. No hedges were derecognized or discontinued during the year ended
     December 31, 2001. No significant amounts of hedge ineffectiveness were
     recognized in earnings during the year ended December 31, 2001.




                                        8


<PAGE>


     Gains and losses on derivatives reported in accumulated other comprehensive
     income are reclassified into earnings when the hedged forecasted sale
     occurs. Approximately, $15.7 million of other comprehensive income is
     expected to be recognized as a reduction to earnings over the next twelve
     months. Amounts recorded in Other Comprehensive Income during the year
     ended December 31, 2001, were as follows (in millions):

         Transition adjustment on January 1, 2001                      $(66.3)
         Reclassified to earnings                                        12.2
         Change in fair value                                            82.6
                                                                        ------
         Balance, December 31, 2001                                    $ 28.5
                                                                        ======

     In addition to the electric derivatives classified as cash flow hedge
     contracts, the Partnership has a Transmission Congestion Contract that is a
     derivative under the definition of SFAS No.133, but does not qualify for
     hedge accounting. This contract is recorded at fair value on the balance
     sheet with changes in the fair value recognized through earnings. In 2000,
     this contract was also recorded at fair value with changes in fair value
     recorded through income under the requirements of Emerging Issues Task
     Force (EITF) No. 98-10, Accounting for Contracts Involved in Energy Trading
     and Risk Management Activities.

     Revenue Recognition - Revenues from the sale of electricity are recorded
     based upon output delivered and rates specified under contract terms.
     Revenues generated from commodity forwards, swaps and options, which are
     entered into for the hedging of forecasted sales, are recorded based on
     settlement accounting with the net amount received recognized as revenue
     for 1999 and 2000. In 2001, such contracts were accounted for in accordance
     with SFAS No. 133. Revenues for ancillary and other services are recorded
     when the services are rendered.

     In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
     Assets". This standard eliminates the amortization of goodwill, and
     requires goodwill to be reviewed periodically for impairment. This standard
     also requires the useful lives of previously recognized assets to be
     adjusted accordingly. This standard is effective for fiscal years beginning
     after December 15, 2001, for all goodwill and other intangible assets
     recognized on the Partnership's balance sheet at that date, regardless of
     when the assets were initially recognized. The Partnership has not
     determined the effects of this standard on its financial reporting.

     In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
     Retirement Obligations". This standard is effective for fiscal years
     beginning after June 15, 2002, and provides accounting requirements for
     asset retirement obligations associated with tangible long- lived assets.
     The Partnership has not determined the effects of this standard on its
     financial reporting.

     Reclassifications - Certain prior year and prior period amounts have been
     reclassified on the consolidated financial statements to conform with the
     2001 presentation.

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 Goudey) 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




                                        9


<PAGE>


     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, 2001, $155,000 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 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 received payments for installed capacity under the New York
     Transition Agreement while it was in effect (see Note 2). Payments received
     while the Somerset Plant was out of service, of approximately $2.1 million,
     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 to the Partnership in 2000.

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.

     On November 30, 2001, AES Funding entered into a thirty-nine month loan
     agreement with a syndicate of financial institutions and institutional
     lenders, with Citibank, N.A. as Agent, in the amount of $300 million. The
     proceeds were used to refinance in full the debt outstanding under the Loan
     Agreement dated May 11, 1999.

     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.




                                       10


<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 February 28, 2005, and bears interest at a variable rate based on the
     terms of the loan agreement, which was 6.875% as of December 31, 2001. 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 obligations are as follows (in thousands):


<TABLE>
<CAPTION>
                                            Principal      Interest            Lease
     Fiscal Years ending December 31,        Portion       Imputed            Payments
<S>                                         <C>          <C>               <C>

          2002                              $ 6,223      $ 56,354          $    62,577
          2003                                1,665        55,885               57,550
          2004                                7,846        55,604               63,450
          2005                                4,411        55,039               59,450
          2006                                6,898        54,652               61,550
          Thereafter                        618,506       696,161            1,314,667
                                           ---------     ---------         ------------

     Total minimum lease payments           645,549       973,695            1,619,244

     Less imputed interest                                                    (973,695)
                                                                           ------------

     Present value of minimum lease payments                               $   645,549

     Less current portion                                                        6,223
                                                                           ------------
     Lease financing - long term                                           $   639,326
                                                                           ============
</TABLE>

     Through January 2, 2020, 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. As of December 31, 2001, the
     Partnership has not deferred any portion of the lease obligations.

     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
     Plants, respectively. Total assets under the leases of these two Plants
     were $650 million at December 31, 2001. These amounts are included in
     electric generation assets. The related accumulated depreciation, combined
     for both leased Plants, as of December 31, 2001 and 2000, was approximately
     $52.1 million and $31.5 million, respectively. 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, 2001, 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 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.




                                       11


<PAGE>


7.   COMMITMENTS AND CONTINGENCIES

     Coal Purchases - In connection with the acquisition of the Partnership's
     four Plants, the Partnership assumed from NYSEG an agreement to purchase
     the coal required by the Somerset and Cayuga Plants. Each year either party
     can request renegotiation of the price of one-third of the coal supplied
     pursuant to this agreement. During 2001 the coal suppliers were committed
     to sell and the Partnership was committed to purchase all three lots of
     coal for the Somerset Plant as well as 70% of the anticipated coal
     purchases for the Cayuga Plant. The supplier requested renegotiation during
     2001 for the 2002 lot but the parties failed to reach agreement. Therefore,
     the parties have current commitments with respect to only two lots in 2002
     and 50% of the anticipated coal purchases at the Cayuga Plant. Either party
     may request renegotiation during 2002 on the third lot, and a request could
     be made to renegotiate the lot for which an agreement was not reached in
     the prior year. Therefore, the commitment of the Partnership for 2003 that
     is not subject to renegotiation and possible cancellation is one lot plus
     50% of the estimated coal usage for the Cayuga Plant. The termination date
     for the contract is December 31, 2003. No later than June 30, 2003, the
     parties shall meet to determine if the agreement is to be extended under
     mutually agreeable terms and conditions. If the agreement were not
     extended, the Partnership would seek a new coal supplier. As of the
     acquisition date of the Plants, the contract prices for the coal purchased
     through 2002 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.
     The purchase accounting liability is amortized as a reduction to coal
     expense over the life of the contract. As of December 31, 2001, the
     remaining liability was approximately $3.3 million.

     Based on the coal purchase commitments for 2002 and 2003, the Partnership
     has expected coal purchases ranging between $100.0 and $130.0 million and
     between $20.7 and $24.7 million, respectively.

     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 did 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 aggregated
     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 under the existing
     transmission agreement to the originally scheduled 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 was subsequently approved 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 has the right under a
     Remote Load Wheeling Agreement (RLWA) to transmit 298 MW over firm
     transmission lines from the Somerset Plant. The Partnership has the right
     to designate alternate points of delivery on NIMO's transmission system
     provided that the Partnership is not entitled to receive any transmission
     service charge credit on the NIMO system.




                                       12

<PAGE>


     On November 1, 2000, the effective date of the final settlement, the
     transmission contract was classified as an energy-trading contract as
     defined in EITF No. 98-10, Accounting for Contracts Involved in Energy
     Trading and Risk Management Activities. From January 1, 2001 the contract
     was accounted for as a derivative under SFAS No. 133. The transmission
     contract was entered into because it provided a reasonable settlement for
     resolving a FERC issue. The agreement is essentially a swap between the
     congestion component of the locational prices posted daily by the New York
     ISO in western New York and the more heavily populated areas in eastern New
     York. The agreement is a financially settled contract since there is no
     requirement to flow power under this agreement. The agreement generates
     gains or losses from exposure to shifts or changes in market prices. The
     Partnership recorded a loss of approximately $29.4 million for the year
     ended December 31, 2001 related to this contract.

     Line of Credit Agreement - On May 14, 1999, the Partnership 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. This facility was terminated as of March 9, 2001. In
     April 2001, the Partnership entered into a $35 million secured revolving
     working capital and letter of credit facility with Union Bank of
     California, N.A. This facility has a term of approximately twenty-one
     months. The Partnership can borrow up to $35 million for working capital
     purposes under this facility. In addition, the Partnership can have letters
     of credit issued under this facility up to $25 million, provided that the
     total amount of working capital borrowings and letters of credit issuances
     may not exceed the $35 million limit on the entire facility. During 2001,
     there was one draw. That draw was for $7 million on July 13, 2001 at an
     interest rate of 8.125%. That draw was repaid on July 31, 2001.

     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.

     The Partnership received an information request letter dated October 12,
     1999 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 (DEC) seeking similar operating and maintenance
     history from the Plants. This information is being sought in connection
     with the Attorney General's and the DEC'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 DEC 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.

     On April 14, 2000, the Partnership received a request for information
     pursuant to Section 114 of the Clean Air Act from the U.S. Environmental
     Protection Agency (EPA) seeking detailed operating and maintenance history
     data for the Cayuga and Somerset Plants. The EPA has commenced an
     industry-wide investigation of coal-fired electric power generators to
     determine compliance with environmental requirements under the Clean Air
     Act associated with repairs, maintenance, modifications and operational
     changes made to coal-fired facilities over the years. The EPA's focus is on
     whether the changes were subject to new source review or new source
     performance standards, and whether best available control technology was or
     should have been used. The Partnership has provided the requested
     documentation and the EPA is currently evaluating the materials. The
     Partnership is unable to estimate the impact, if any, of this investigation
     on its financial condition or results of future operations. By letter dated
     May 25, 2000, the DEC issued a Notice of Violation (NOV) to NYSEG for
     violations of the Clean Air Act and the Environmental Conservation Law at
     the Greenidge and Westover Plants related to NYSEG's alleged failure to
     obtain an air permitting review for repairs and improvements made during
     the 1980s and 1990s, which was prior to the acquisition of the Plants by
     the Partnership. Pursuant to the purchase agreement relating to the
     acquisition of the Plants from NYSEG, the Partnership agreed to assume
     responsibility for environmental liabilities that arose while NYSEG owned
     the Plants. On September 12, 2000, the Partnership agreed with NYSEG that
     the Partnership will assume the defense of and responsibility for the NOV,
     subject to a reservation of its right to assert applicable exceptions to
     its contractual undertaking to assume preexisting environmental
     liabilities. The financial and operational effect of this NOV is still
     being discussed with the DEC. The Partnership is unable to estimate the
     effect of this NOV on its financial condition or results of future
     operations.


                                       13


<PAGE>


     It is possible that the DEC NOV and other potential enforcement actions
     arising out of the Attorney General, DEC, and EPA investigations may result
     in penalties and the potential requirement to install additional air
     pollution control equipment and could require the Partnership to make
     substantial expenditures.

     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
     DEC 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 EPA. Each SO2 allowance authorizes the emission
     of one ton of SO2 during the calendar year. 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.

     On October 16, 2001 AES Greenidge, L.L.C. was awarded a Federal Clean Coal
     Grant that will fund 50% of the capital costs and 30% of the operations and
     maintenance costs for backend technology. This technology will include a
     single bed, in-duct Selective Catalytic Reduction (SCR) unit in combination
     with low-NOx combustion technology, on Greenidge Unit 4 firing on coal and
     biomass. It will also include a Circulating Dry Scrubber for SO2, mercury
     and acid gas removal. AES Greenidge L.L.C.'s share of the costs for the
     54-month project will be approximately $9.8 million.

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. As of December 31, 2001, 2000 and 1999, $4.2 million, $4.6 million
     and $2.4 million, respectively, has been recorded by the Partnership as
     operating expenses and other accrued liabilities under this agreement.

     On August 14, 2000, SRC entered into a $26 million credit facility with
     Fortis Capital Corp. which replaced in its entirety a credit facility for
     the same amount previously provided to SRC by an affiliate of CIBC World
     Markets. The new credit facility provided by Fortis Capital Corp. consists
     of a 14-year term note (maturing on May 6, 2014), with principal and
     interest payments due quarterly. From August 14, 2000 to August 13, 2002,
     the interest rate on the loans under this credit facility is equal to a
     Base Rate plus 0.625% for the Base Rate loans and LIBOR plus 1.375% for
     LIBOR loans. From August 14, 2002 to August 13, 2005, the interest rate on
     the loans under this credit facility is equal to a Base Rate plus 0.750%
     for the Base Rate loans and LIBOR plus 1.500% for LIBOR loans. From August
     14, 2005 to August 13, 2008, the interest rate on the loans under this
     credit facility is equal to a Base Rate plus 0.875% for the Base Rate loans
     and LIBOR plus 1.625% for LIBOR loans. From August 14, 2012 to August 13,
     2014, the interest rate on the loans under this credit facility is equal to
     a Base Rate plus 1.125% for the Base Rate loans and LIBOR plus 1.875% for
     LIBOR loans. From August 14, 2008 to August 13, 2012, the interest rate on
     the loans under this credit facility is equal to a Base Rate plus 1.375%
     for the Base Rate loans and LIBOR plus 2.125% for LIBOR loans. The
     principal amount of SRC's outstanding indebtedness under this credit
     facility was approximately $23.2 million as of December 31, 2001.

     In November 2000, the Partnership entered into a three-year agreement
     for energy marketing services with Odyssey, a wholly owned subsidiary of
     AES. Odyssey is responsible for marketing the Partnership's electric
     energy, unforced capacity, and ancillary services. The Partnership will pay
     Odyssey $300,000 per month over the term of the agreement.

     Odyssey acts as agent on behalf of the Partnership in the over-the-counter
     and New York ISO markets. As agent, Odyssey manages all energy transactions
     under the Partnership name including (i) preparing confirmations for the
     Partnership and approving confirmations with counter-parties, (ii)
     conducting monthly check-outs with counter-parties as appropriate before
     the preparation of invoices, (iii) invoicing counter-parties for the term
     of the transactions and (iv) otherwise managing and executing the terms of
     the transactions in accordance with their provisions.




                                       14


<PAGE>


     Odyssey provides data management services for the Partnership by
     maintaining databases of pricing, load, transmission, weather and
     generation data to aid in analysis to optimize the value of the
     Partnership's assets.

     Odyssey maintains a transaction management system to manage day-ahead
     commitments with the New York ISO and swap and physical values with
     counter-parties and to provide daily financial reporting and end of day
     budget variance, forward mark to market and commercially accepted risk
     analysis.

     In 2001, the Partnership entered into bilateral contract transactions with
     AES New Energy, a wholly owned subsidiary of AES. These transactions
     include forward sales of electric energy and unforced capacity at market
     based rates. For the year ended December 31, 2001, the Partnership
     recognized revenues of approximately $11.7 million related to the physical
     delivery of electricity or unforced capacity and the subsequent change in
     the market value of these contracts. As of December 31, 2001 the related
     account receivable - trade between AES New Energy and the Partnership was
     $2.6 million. The exposure at December 31, 2001 related to these contract
     transactions is less than 10% of the Partnership's estimated cash revenues
     for the year 2001.

     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.

     AES contributed approximately $9.4 million to the Partnership in 2001,
     related to the construction of the SCR on Unit 1 of the Cayuga Plant, which
     became operational on June 7, 2001.

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
     non-collectively 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 NYSEG. 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, 2001, the Plan was funded to the extent required by Internal
     Revenue Code (IRC) Section 412 minimum funding and the requirement of IRC
     Section 404, maximum contribution limits. The Partnership will make the
     required minimum contribution within the Employee Retirement Income
     Security Act (ERISA) guidelines. Pension benefits are based on years of
     credited service, age of the participant, and average earnings. During 2000
     and 2001, collectively bargained people were offered the opportunity to
     freeze their accrued benefit payable under the Plan and opt into the AES
     Profit Sharing and Stock Ownership Plans.

     Significant assumptions used in the calculations of the net benefit cost
     and projected benefit obligation for the periods ending December 31, 2001,
     2000 and 1999 are as follows:

          Discount rate                                                   6.25%

          Rate of compensation increase                                   4.75%

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




                                       15


<PAGE>


Net benefit cost for the period ended December 31, 2001, 2000 and 1999 includes
     the following components (in thousands):


<TABLE>
<CAPTION>
                                                                  2001          2000          1999
                                                                --------      --------      --------
<S>                                                            <C>           <C>           <C>
         Service cost                                          $    408      $    851      $    498
         Interest cost on projected benefit obligation            1,293         1,487           879
         Expected return on plan assets                            (312)          (56)          -
         Curtailment gain                                           -          (5,271)          -
                                                                --------      --------      --------

         Net benefit cost                                      $  1,389      $ (2,989)        1,377
                                                                ========      ========      ========

     Change in projected benefit obligation (in thousands):
         Projected benefit obligation, beginning of periods    $ 20,801      $ 23,880      $ 22,503
         Service cost                                               408           851           498
         Interest cost                                            1,293         1,487           879
         Actuarial (gain) loss                                     (469)          409           -
         Benefits paid                                             (193)         (167)          -
         Curtailment                                                -          (5,659)          -
                                                                --------      --------      --------

         Projected benefit obligation, end of year/period      $ 21,840      $ 20,801      $ 23,880
                                                                ========      ========      ========


                                                                  2001          2000          1999
                                                                --------      --------      --------
     Change in plan assets (in thousands):
         Fair value of plan assets (in thousands):             $  2,020      $    -             -
         Actual return on plan assets                              (156)           77           -
         Employer contributions                                   3,202         2,110           -
         Benefits paid                                             (193)         (167)          -
                                                                --------      --------      --------

         Fair value of plan assets, end of year                $  4,873      $  2,020           -
                                                                --------      --------      --------
         Funded status/accrued benefit liability               $(16,968)     $(18,781)     $(23,880)
                                                                ========      ========      ========
</TABLE>

     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. The accumulated benefit obligation was
     approximately $16.7 million, $15.5 million and $11.2 million as of December
     31, 2001, 2000 and 1999, respectively.

     During 2000, 137 participants of the Plan opted out and either joined an
     AES Plan, retired, or became terminated. This resulted in a curtailment
     gain to the Plan of approximately $ 5.3 million and is included within
     other income in the statement of income. As of December 31, 2001, the Plan
     had 101 active participants.

     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.  LONG-TERM INCENTIVE PROGRAM

     Stock Option Plan - Employees of the Partnership participate in the AES
     Stock Option Plan (the SOP) that provides for grants of stock options to
     eligible participants. The following disclosures relate to the Partnership
     employees' share of benefits under the SOP. Options granted during 2001 and
     2000 of 469,899 and 12,756, respectively, had weighted average fair value
     of approximately $13.52 and $22.50, respectively, using the Black-Scholes
     valuation method. Significant assumptions used in the Black-Scholes
     valuation method for shares granted in 2001 and 2000 were: expected stock
     price volatility




                                       16


<PAGE>


     of 86% and 48% respectively; expected dividend yield of 0% and 0%,
     respectively; risk-free interest rate of 4.8% and 5.1%, respectively; and
     an expected life of 8 years and 7 years, respectively. No options were
     granted during 1999.

     Outstanding stock options become exercisable on a cumulative basis
     commencing two years from the date of grant and expire ten years after the
     date of grant. As permitted under SFAS No. 123,"Accounting for Stock-Based
     Compensation", AES applies APB Opinion No. 25 in accounting for the SOP. As
     the exercise price of all stock options are equal to their fair market
     value at the time the options are granted, the Partnership did not
     recognize any compensation expense related to the SOP using the intrinsic
     value based method. Had compensation expense been recognized using the fair
     value based method under SFAS No. 123, the Partnership's consolidated
     earnings would have decreased by $6,117,979 and $273,368 in 2001 and 2000,
     respectively.

11.  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, 2001. The
     Partnership is not aware of any factors that would significantly affect the
     estimated fair value amounts since that date.

12.  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.

13.  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 ten 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. The Partnership has made four distributions to its partners to date:
     July 11, 2000, in the amount of $35 million; January 12, 2001, in the
     amount of $32.5 million; July 12, 2001, in the amount of $65.7 million; and
     January 9, 2002, in the amount of $32.6 million.

14.  SUBSEQUENT EVENTS

     AES contributed approximately $1.2 million to the Partnership in January
     2002, related to the construction of the SCR on Unit 1 of Cayuga, which
     became operational on June 7, 2001.

     On February 19, 2002, AES announced that it intends to reposition itself in
     the electric business by fully contracting or divesting its merchant
     generation businesses. AES stated that it made this decision to reduce
     earnings volatility and strengthen its balance sheet. The Partnership is
     one of the merchant generating businesses. The Partnership's business could
     be fully contracted if it were to sign one or more long-term power sales
     agreements for the output of the Plants. As of the date of this Annual
     Report on Form 10-K, no specific proposal to fully contract or divest the
     Partnership's operations is under consideration. The Partnership is
     adopting a policy of not commenting on proposed transactions and we
     disclaim any obligation to provide information with respect to proposed
     transactions until a definitive agreement has been reached.




                                       17


<PAGE>


INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying consolidated balance sheets of AES NY, L.L.C.
(an indirect wholly owned subsidiary of The AES Corporation) and subsidiaries
(the Company) as of December 31, 2001 and 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform our audits 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 audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated balance sheets present fairly, in all material
respects, the financial position of AES NY, L.L.C. and subsidiaries as of
December 31, 2001 and 2000, in conformity with accounting principles generally
accepted in the United States of America.


/s/Deloitte & Touche LLP

McLean, Virginia
February 19, 2002









                                       18


<PAGE>


                                 AES NY, L.L.C.
                          CONSOLIDATED BALANCE SHEETS,
                     DECEMBER 31, 2001 and DECEMBER 31, 2000

<TABLE>
<CAPTION>
(Amounts in Thousands)
-------------------------------------------------------------------------------------------
December 31,                                                    2001                 2000
                                                               ------               ------
<S>                                                      <C>                  <C>
ASSETS

CURRENT ASSETS:
     Restricted cash:
        Operating - cash and cash equivalents            $      5,805         $     12,207
        Revenue account                                        71,606               73,141
     Accounts receivable - trade                               27,590               34,976
     Accounts receivable - affiliates                           3,254                2,651
     Accounts receivable - other                                2,316                2,430
     Inventory                                                 29,615               25,151
     Prepaid expenses                                           6,539                6,244
                                                         -------------        -------------
          Total current assets                                146,725              156,800
                                                         -------------        -------------
PROPERTY, PLANT, EQUIPMENT, AND RELATED ASSETS:
     Land                                                       7,334                7,327
     Electric generation assets (net of accumulated
        depreciation of $66,962 and  $39,390)                 733,473              743,029
     Other Intangible assets -net of accumulated
        amortization of $19,941 and $12,273                   225,864              232,480
                                                         -------------        -------------
          Total property, plant, equipment
            and related assets                                966,671              982,836
                                                         -------------        -------------
OTHER ASSETS:
    Derivative valuation                                       55,182                 -
     Transmission contract                                       -                  24,851
     Rent reserve account                                      31,719               30,978
                                                         -------------        -------------
TOTAL ASSETS                                             $  1,200,297         $  1,195,465
                                                         =============        =============
LIABILITIES AND MEMBER'S EQUITY

CURRENT LIABILITIES:
     Accounts payable                                    $      1,663         $      1,457
     Lease financing - current                                  6,223                1,813
     Environmental remediation                                    155                2,000
     Accrued interest expense                                  28,353               29,472
     Due to The AES Corporation and affiliates                  6,586                8,746
     Other accrued expenses                                    14,772               18,912
     Other liabilities                                          4,629                5,020
                                                         -------------        -------------
          Total current liabilities                            62,381               67,420
                                                         -------------        -------------

LONG-TERM LIABILITIES:
     Lease financing - long-term                              639,326              645,549
     Environmental remediation                                 13,420               12,801
     Defined benefit plan obligation                           16,630               18,592
     Other liabilities                                          1,058                3,267
     Derivative valuation liability                            26,665                 -
     Transmission Congestion contract                           3,506                 -
                                                         -------------        -------------
          Total long-term liabilities                         700,605              680,209
                                                         -------------        -------------
TOTAL LIABILITIES                                             762,986              747,629

COMMITMENTS AND CONTINGENCIES (Note 6)

MINORITY INTEREST                                             432,938              443,358
MEMBER'S EQUITY                                                 4,373                4,478
                                                         -------------        -------------
TOTAL LIABILITIES AND MEMBER'S EQUITY                    $  1,200,297         $  1,195,465
                                                         =============        =============
</TABLE>

        The notes are an integral part of the consolidated Balance Sheets




                                       19


<PAGE>


                                 AES NY, L.L.C.
                      NOTES TO CONSOLIDATED BALANCE SHEETS,
          YEAR ENDED DECEMBER 31, 2001 AND YEAR ENDED DECEMBER 31, 2000

================================================================================

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 their operations and
     affairs, and is responsible for all liabilities and obligations of both
     entities.

     AEE, a Delaware limited partnership, 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 New York, 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 partnership, 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."

     At the time that AEE and ACR acquired the Plants, AEE and ACR entered into
     two-year agreements for energy marketing services with Merchant Energy
     Group of the Americas, Inc. (MEGA), which was then an Annapolis,
     Maryland-based subsidiary of Gener S.A., but which has since been sold.
     MEGA was responsible for marketing AEE's and ACR's electric energy,
     installed capacity, and ancillary services in the deregulated New York
     power market. The marketing agreements between AEE and ACR and MEGA were
     terminated effective November 26, 2000. AEE has paid MEGA $1.6 million and
     made the first of four additional payments from 2002 to 2005 of $225,000
     each, as part of the termination of the agreement with MEGA. Gener S.A.
     subsequently became a direct wholly owned subsidiary of AES.

     AEE and ACR entered into arrangements with AES Odyssey, L.L.C.(Odyssey), a
     direct wholly owned subsidiary of AES. These agreements commenced on
     November 27, 2000 and are for a term of three years. Odyssey will provide
     data management, marketing, scheduling, invoicing and risk management
     services for a fee of $300,000 per month (see note 8).

     The AEE Plants sell generated electricity, as well as unforced capacity and
     ancillary services, directly into the markets operated by the New York
     Independent System Operator (ISO) system, PJM (Pennsylvania, New Jersey,
     Maryland) Interconnection and ISO New England. 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.




                                       20


<PAGE>


     During the fourth quarter of 2000, ACR placed the ACR Plants on long-term
     cold standby. The long-term cold standby designation means that these
     plants require more than 14 days to be brought on-line. The Company is
     currently evaluating the future of these plants.

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, 2001 and
     2000 (using the equity method of accounting) consist only of the 1%
     ownership interest in AEE ($4,330,000 and $4,414,000, respectively) and the
     1% ownership interest in ACR ($32,000 and $64,000, respectively). The
     Company had no liabilities as of December 31, 2001 and 2000, other than
     liabilities of AEE and ACR for which it is responsible as General Partner
     of AEE and ACR.

     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 Bankers Trust Company, as 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 is not permitted under the terms of the lease
     documents. Amendments, modifications or reallocations of the annual
     operating budget that result in changes of 25% (positive or negative) in
     the amounts set forth in the annual operating budget require confirmation
     from an independent engineer that such payment is based on reasonable
     assumptions.

     Inventory - Inventory 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 consisted of the following (in thousands):

                                                          2001        2000
                                                       ----------  ----------
         Coal and other raw materials                   $  13,488   $   7,487
         Spare parts, materials, and supplies              16,127      17,664
                                                       ----------  ----------

         Total                                          $  29,615   $  25,151
                                                       ==========  ==========

     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 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.




                                       21


<PAGE>


     The Company is currently evaluating the future of the Jennison and Hickling
     plants and may dispose or shut down these plants. As such, the electric
     generation assets of these two plants are being depreciated over two years
     using the straight-line method. Maintenance and repairs are charged to
     expense as incurred. During the fourth quarter of 2000, ACR placed the ACR
     Plants on long-term cold standby. The long-term cold standby designation
     means that these plants require more than 14 days to be brought on-line.
     The ACR Plants continue to generate revenue from the sales of environmental
     allowances which they receive from regulatory authorities.

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

<TABLE>
<CAPTION>
                                                                2001
                                                   ------------------------------
                                                      AEE        ACR      Total
<S>                                               <C>         <C>       <C>

     Electric generation tangible assets          $ 794,901   $ 5,534   $800,435
     Other intangible assets                        245,805       -     $245,805
     Accumulated depreciation and amortization      (82,564)   (4,339)  $(86,903)
                                                   ---------   -------   --------
     Total                                        $ 958,142   $ 1,195   $959,337
                                                   =========   =======   ========

                                                                2000
                                                   ------------------------------
                                                      AEE        ACR      Total

     Electric generation tangible assets          $ 777,658   $ 4,761   $782,419
     Other intangible assets                        244,753       -     $244,753
     Accumulated depreciation and amortization      (49,022)   (2,641)  $(51,663)
                                                   ---------   -------   --------
     Total                                        $ 973,389   $ 2,120   $975,509
                                                   =========   =======   ========
</TABLE>


     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, 2001 and 2000, 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, 2001, 2000, and 1999 were approximately $1.5 million,
     $1.4 million and $870,000, respectively, and are included in the rent
     reserve account balance. At December 31, 2001 and 2000, the accreted value
     of the Payment Undertaking Agreement exceeded the required balance of the
     rent reserve account. This amount




                                       22


<PAGE>


     is being accounted for as a restricted cash balance and is included within
     the rent reserve account on the accompanying balance sheets, 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.

     New York Transition Agreement - As the New York ISO system represents a
     deregulated environment, the ISO attempts 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 sold 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 recognized revenue
     under this contract as it was earned, which was $68 per MW per day for
     installed capacity made available. This agreement expired on April 30,
     2001.

     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 their member or partners.

     Use of Estimates - The preparation of financial statements in conformity
     with accounting principles generally accepted in the United States of
     America 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.

     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. As of December 31, 2001, the Company has recorded $28.5 million
     of other comprehensive income due to the adoption of SFAS No. 133. In the
     years prior to the adoption of SFAS No. 133, "Accounting for Derivative
     Instruments and Hedging Activities", the Company did not have any items of
     other comprehensive income.

     New Accounting Pronouncements - On January 1, 2001, the Company adopted
     SFAS No. 133, "Accounting for Derivative Instruments and Hedging
     Activities", which, as amended, established new accounting and reporting
     standards for derivative instruments and hedging activities. The Statement
     requires that the Company recognize all derivatives, as defined in the
     Statement, on the balance sheet at fair value. Derivatives, or any portion
     thereof, that are not effective, hedges are adjusted to fair value through
     income. Derivatives that are effective hedges are recognized in other
     comprehensive income (loss) until the hedged items are recognized in
     earnings. The adoption of SFAS No. 133 on January 1, 2001, resulted in a
     cumulative reduction of Other Comprehensive Income in member's equity of
     $66.3 million.

     AEE utilizes derivative financial instruments to hedge commodity price
     risk. AEE utilizes electric derivative instruments, including swaps and
     forwards, to hedge the risk related to forecasted electricity sales over
     the next four years. The majority of AEE's electric derivatives are
     designated and qualify as cash flow hedges. No hedges were derecognized or
     discontinued during the year ended December 31, 2001. No significant
     amounts of hedge ineffectiveness were recognized in earnings during the
     year ended December 31, 2001.




                                       23


<PAGE>


     Gains and losses on derivatives reported in accumulated other comprehensive
     income are reclassified into earnings when the hedged forecasted sale
     occurs. Approximately, $15.7 million of other comprehensive income is
     expected to be recognized as a reduction to earnings over the next twelve
     months. Amounts recorded in Other Comprehensive Income during the year
     ended December 31, 2001, were as follows (in millions):

         Transition adjustment on January 1, 2001                     $(66.3)
         Reclassified to earnings                                       12.2
         Change in fair value                                           82.6
                                                                       ------
         Balance, December 31, 2001                                   $ 28.5
                                                                       ======

     In addition to the electric derivatives classified as cash flow hedge
     contracts, AEE has a Transmission Congestion Contract that is a derivative
     under the definition of SFAS No. 133, but does not qualify for hedge
     accounting. This contract is recorded at fair value on the balance sheet
     with changes in the fair value recognized through earnings. In 2000, this
     contract was also recorded at fair value with changes in fair value
     recorded through income under the requirements of Emerging Issues Task
     Force (EITF) No. 98-10, Accounting for Contracts Involved in Energy Trading
     and Risk Management Activities.

     Revenue Recognition - Revenues from the sale of electricity are recorded
     based upon output delivered and rates specified under contract terms.
     Revenues generated from commodity forwards, swaps and options, which are
     entered into for the hedging of forecasted sales, are recorded based on
     settlement accounting with the net amount received recognized as revenue
     for 1999 and 2000. In 2001 such contracts were accounted for in accordance
     with SFAS No. 133. Revenues for ancillary and other services are recorded
     when the services are rendered.

     In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
     Assets". This standard eliminates the amortization of goodwill, and
     requires goodwill to be reviewed periodically for impairment. This standard
     also requires the useful lives of previously recognized assets to be
     adjusted accordingly. This standard is effective for fiscal years beginning
     after December 15, 2001, for all goodwill and other intangible assets
     recognized on the Company's balance sheet at that date, regardless of when
     the assets were initially recognized. The Company has not determined the
     effects of this standard on its financial reporting.

     In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
     Retirement Obligations". This standard is effective for fiscal years
     beginning after June 15, 2002, and provides accounting requirements for
     asset retirement obligations associated with tangible long-lived assets.
     The Company has not determined the effects of this standard on its
     financial reporting.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
     Disposal of Long-Lived Assets". The provisions of this statement are
     effective for financial statements issued for fiscal years beginning after
     December 15, 2001, and address reporting for the impairment or disposal of
     long-lived assets. SFAS No. 144 provides guidance for developing estimates
     of future cash flows used to test assets for recoverability and requires
     that assets to be disposed of be classified as held for sale when certain
     criteria are met. The statement also extends the reporting of discontinued
     operations to all components of an entity and provides guidance for
     recognition of a liability for obligations associated with disposal
     activity. The Company believes that the initial adoption of the provisions
     of SFAS No. 144 will not have any material impact on its financial position
     or results of operations.

     Reclassifications - Certain prior year and prior period amounts have been
     reclassified on the consolidated financial statements to conform with the
     2001 presentation.

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 Goudey) 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




                                       24


<PAGE>


     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, 2001, $155,000 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 received payments for installed capacity under the New York Transition
     Agreement while it was in effect (see Note 2). Payments received while the
     Somerset Plant was out of service, of approximately $2.1 million, 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 to AEE in 2000.

     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.

     During the fourth quarter of 2000, ACR placed the ACR Plants on long-term
     cold standby. The long-term cold standby designation means that these
     plants require more than 14 days to be brought on-line. The Company is
     currently evaluating the future of these plants. The ACR plants continue to
     generate revenue from the sales of environmental allowances which they
     receive from regulatory authorities.




                                       25


<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, L.L.C. 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, L.L.C. which, in turn, made a capital contribution of
     approximately $54 million to AEE and approximately $3 million to ACR.

     On November 30, 2001, AES Funding entered into a thirty-nine month loan
     agreement with a syndicate of financial institutions and institutional
     lenders, with Citibank, N.A. as Agent, in the amount of $300 million. The
     proceeds were used to refinance in full the debt outstanding under the Loan
     Agreement dated May 11, 1999.

     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 February 28, 2005, and bears interest at a variable rate based on the
     terms of the loan agreement, which was 6.875% as of December 31, 2001. 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 obligations are as follows (in thousands):

                                          Principal     Imputed        Lease
      Fiscal Years Ending December 31,     Portion      Interest      Payments

      2002                              $   6,223      $ 56,354    $   62,577
      2003                                  1,665        55,885        57,550
      2004                                  7,846        55,604        63,450
      2005                                  4,411        55,039        59,450
      2006                                  6,898        54,652        61,550
      Thereafter                          618,506       696,161     1,314,667
                                          -------      ---------   -----------

      Total minimum lease payments        645,549       973,695     1,619,244

      Less imputed interest                                          (973,695)
                                                                   -----------

      Present value of minimum lease payments                         645,549

      Less current portion                                              6,223
                                                                   -----------

      Lease financing - long term                                     639,326
                                                                   ===========

     Through January 2, 2020, and so long as no lease event of default exists, a
     portion of the rent payable under each lease may be deferred until after




                                       26


<PAGE>


     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
     Plants, respectively. Total assets under the leases of these two Plants
     were $650 million at December 31, 2001. These amounts are included in
     electric generation assets. The related accumulated depreciation, combined
     for both leased Plants, as of December 31, 2001 and 2000, was approximately
     $52.1 million and $31.5 million, respectively.

     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 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 ten 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. AEE has made four distributions to its partners
     to date: July 11, 2000, in the amount of $35 million; January 12, 2001, in
     the amount of $32.5 million; July 12, 2001, in the amount of $65.7 million;
     and January 9, 2002, in the amount of $32.6 million.

     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, 2001, 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 by AEE of its four
     Plants, AEE assumed from NYSEG an agreement to purchase the coal required
     by the Somerset and Cayuga Plants. Each year either party can request
     renegotiation of the price of one-third of the coal supplied pursuant to
     this agreement. During 2001 the coal suppliers were committed to sell and
     AEE was committed to purchase all three lots of coal for Somerset as well
     as 70% of the anticipated coal purchases for the Cayuga Plant. The supplier
     requested renegotiation during 2001 for the 2002 lot but the parties failed
     to reach agreement. Therefore, the parties have current commitments with
     respect to only two lots in 2002 and 50% of the anticipated coal purchases
     at the Cayuga Plant. Either party may request renegotiation during 2002 on
     the third lot, and a request could be made to renegotiate the lot for which
     an agreement was not reached in the prior year. Therefore, the commitment
     of AEE for 2003 that is not subject to renegotiation and possible
     cancellation is one lot plus 50% of the estimated coal usage for Cayuga.
     The termination date for the contract is the end of 2003. No later than
     June 30, 2003, the parties shall meet to determine if the agreement is to
     be extended under mutually agreeable terms and conditions. If the agreement
     were not extended, AEE would seek




                                       27


<PAGE>


     a new coal supplier. As of the acquisition date of the Plants, the contract
     prices for the coal purchased through 2002 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. The purchase accounting liability is amortized as a
     reduction to coal expense over the life of the contract. As of December 31,
     2001, the remaining liability was approximately $3.3 million.

     Based on the coal purchase commitments for 2002 and 2003, AEE has expected
     coal purchases ranging between $100.0 and $130.0 million and between $20.7
     and $24.7 million, respectively.

     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 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 did 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 aggregated 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 under the existing transmission agreement to the originally
     scheduled 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 was subsequently approved 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 has the
     right under a Remote Load Wheeling Agreement ("RLWA") to transmit 298 MW
     over firm transmission lines from the Somerset Plant. AEE has the right to
     designate alternate points of delivery on NIMO's transmission system
     provided that AEE is not entitled to receive any transmission service
     charge credit on the NIMO system. On November 1, 2000, the effective date
     of the final settlement, the transmission contract was classified as an
     energy-trading contract as defined in EITF No. 98-10, Accounting for
     Contracts Involved in Energy Trading and Risk Management Activities. From
     January 1, 2001 the contract was accounted for as a derivative under SFAS
     No. 133. The transmission contract was entered into because it provided a
     reasonable settlement for resolving a FERC issue. The agreement is
     essentially a swap between the congestion component of the locational
     prices posted daily by the New York ISO in western New York and the more
     heavily populated areas in eastern New York. The agreement is a financially
     settled contract since there is no requirement to flow power under this
     agreement. The agreement generates gains or losses from exposure to shifts
     or changes in market prices. AEE recorded a loss of approximately $29.4
     million for the year ended December 31, 2001 related to this contract.

     Line of Credit Agreement - On May 14, 1999, AEE 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. This facility was terminated as of March 9, 2001. In
     April 2001, AEE entered into a $35 million secured revolving working
     capital and letter of credit facility with Union Bank of California, N.A.
     This facility has a term of approximately twenty-one months. AEE can borrow
     up to $35 million for working capital purposes under this facility. In
     addition, AEE can have letters of credit issued under this facility up to
     $25 million, provided that the total amount of working capital borrowings
     and letters of credit issuances may not exceed the $35 million limit on the
     entire facility. During 2001, there was one draw. That draw was for $7
     million on July 13, 2001 at an interest rate of 8.125%. That draw was
     repaid on July 31, 2001.

     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


                                       28


<PAGE>


     be higher or lower than the amount currently accrued.

     AEE received an information request letter dated October 12, 1999 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 (DEC) 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 DEC'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 DEC 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.

     On April 14, 2000, AEE received a request for information pursuant to
     Section 114 of the Clean Air Act from the U.S. Environmental Protection
     Agency (EPA) seeking detailed operating and maintenance history data for
     the Cayuga and Somerset Plants. The EPA has commenced an industry-wide
     investigation of coal- fired electric power generators to determine
     compliance with environmental requirements under the Clean Air Act
     associated with repairs, maintenance, modifications and operational changes
     made to coal-fired facilities over the years. The EPA's focus is on whether
     the changes were subject to new source review or new source performance
     standards, and whether best available control technology was or should have
     been used. AEE has provided the requested documentation and the EPA is
     currently evaluating the materials. The Company is unable to estimate the
     impact, if any, of this investigation on its financial condition or results
     of future operations.

     By letter dated May 25, 2000, the DEC issued a Notice of Violation (NOV) to
     NYSEG for violations of the Clean Air Act and the Environmental
     Conservation Law at the Greenidge and Westover Plants related to NYSEG's
     alleged failure to obtain an air permitting review for repairs and
     improvements made during the 1980s and 1990s, which was prior to the
     acquisition of the Plants by AEE.

     Pursuant to the purchase agreement relating to the acquisition of the
     Plants from NYSEG, AEE agreed to assume responsibility for environmental
     liabilities that arose while NYSEG owned the Plants. On September 12, 2000,
     AEE agreed with NYSEG that AEE will assume the defense of and
     responsibility for the NOV, subject to a reservation of its right to assert
     applicable exceptions to its contractual undertaking to assume preexisting
     environmental liabilities. The financial and operational effect of this NOV
     is still being discussed with the DEC. The Company is unable to estimate
     the effect of this NOV on its financial condition or results of future
     operations.

     It is possible that the DEC NOV and other potential enforcement actions
     arising out of the Attorney General, DEC, and EPA investigations may result
     in penalties and the potential requirement to install additional air
     pollution control equipment and could require the Company to make
     substantial expenditures.

     Nitrogen Oxide and Sulfur Dioxide Emission Allowances - The 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 DEC 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 six Plants are also subject
     to SO2 emission allowance requirements imposed by the EPA. Each SO2
     allowance authorizes the emission of one ton of SO2 during the calendar
     year. 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.

     On October 16, 2001 AES Greenidge, L.L.C. was awarded a Federal Clean Coal
     Grant that will fund 50% of the capital costs and 30% of the operations and
     maintenance costs for backend technology. This technology will include a
     single bed, in-duct




                                       29


<PAGE>


     Selective Catalytic Reduction (SCR) unit in combination with low-NOX
     combustion technology, on Greenidge Unit 4 firing on coal and biomass. It
     will also include a Circulating Dry Scrubber for SO2, mercury and acid gas
     removal. AES Greenidge L.L.C.'s share of the costs for the 54-month project
     will be approximately $9.8 million.

     In October 1999, ACR entered into a consent order with the DEC 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
     called for a site investigation, which was conducted and indicated that
     there is a possibility that some groundwater remediation at the site may be
     required. AEE2, L.L.C. contributed one-half of the costs to close the
     landfill, which were approximately $2 million, and will contribute
     additional costs for long term groundwater monitoring. While the actual
     closure costs may exceed $1.6 million, which is included in the
     environmental remediation liability (see Note 3), management does not
     expect any added closure costs to be material.

     ACR has recently reported that concentrations of a number of chemicals in a
     few groundwater wells increased in the year ending December 31, 2001, since
     the Jennison and Hickling Plants were placed on long term cold standby. ACR
     has notified the NYSDEC and anticipates determining what remediation is
     needed, if any. Until ACR develops a plan with the NYSDEC, the Company
     cannot estimate if this will have a material effect of its operations.

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.

     On August 14, 2000, SRC entered into a $26 million credit facility with
     Fortis Capital Corp. which replaced in its entirety a credit facility for
     the same amount previously provided to SRC by an affiliate of CIBC World
     Markets. The new credit facility provided by Fortis Capital Corp. consists
     of a 14-year term note (maturing on May 6, 2014), with principal and
     interest payments due quarterly. From August 14, 2000 to August 13, 2002,
     the interest rate on the loans under this credit facility is equal to a
     Base Rate plus 0.625% for the Base Rate loans and LIBOR plus 1.375% for
     LIBOR loans. From August 14, 2002 to August 13, 2005, the interest rate on
     the loans under this credit facility is equal to a Base Rate plus 0.750%
     for the Base Rate loans and LIBOR plus 1.500% for LIBOR loans. From August
     14, 2005 to August 13, 2008, the interest rate on the loans under this
     credit facility is equal to a Base Rate plus 0.875% for the Base Rate loans
     and LIBOR plus 1.625% for LIBOR loans. From August 14, 2012 to August 13,
     2014, the interest rate on the loans under this credit facility is equal to
     a Base Rate plus 1.125% for the Base Rate loans and LIBOR plus 1.875% for
     LIBOR loans. From August 14, 2008 to August 13, 2012, the interest rate on
     the loans under this credit facility is equal to a Base Rate plus 1.375%
     for the Base Rate loans and LIBOR plus 2.125% for LIBOR loans. The
     principal amount of SRC's outstanding indebtedness under this credit
     facility was approximately $23.2 million as of December 31, 2001.

     In November 2000, AEE entered into a three-year agreement for energy
     marketing services with Odyssey, a wholly owned subsidiary of AES. Odyssey
     is responsible for marketing AEE's electric energy, unforced capacity, and
     ancillary services. AEE will pay Odyssey $300,000 per month over the term
     of the agreement.




                                       30


<PAGE>


     Odyssey acts as agent on behalf of AEE in the over-the-counter and New York
     ISO markets. As agent, Odyssey manages all energy transactions under AEE's
     name including (i) preparing confirmations for AEE and approving
     confirmations with counter-parties, (ii) conducting monthly check-outs with
     counter-parties as appropriate before the preparation of invoices, (iii)
     invoicing counter-parties for the term of the transactions and (iv)
     otherwise managing and executing the terms of the transactions in
     accordance with their provisions.

     Odyssey provides data management services for AEE by maintaining databases
     of pricing, load, transmission, weather and generation data to aid in
     analysis to optimize the value of AEE's assets. Odyssey maintains a
     transaction management system to manage day-ahead commitments with the New
     York ISO and swap and physical values with counter-parties and to provide
     daily financial reporting and end-of-day budget variance, forward mark to
     market and commercially accepted risk analysis.

     In 2001, AEE entered into derivative transactions with AES New Energy, a
     wholly owned subsidiary of AES. These transactions include the forward
     sales of electric energy and unforced capacity. For the year ended December
     31, 2001, AEE recognized revenues of approximately $11.7 million related to
     the physical delivery of electricity or unforced capacity and the
     subsequent change in the market value of these contracts. As of December
     31, 2001 the related account receivable - trade between AES New Energy and
     AEE was $2.6 million. The exposure at December 31, 2001 related to these
     contract transactions is less than 10% of AEE's estimated cash revenues for
     the year 2001.

     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.

     AES contributed approximately $9.4 million to AEE in 2001, related to the
     construction of the SCR on Unit 1 of the Cayuga Plant, which became
     operational on June 7, 2001.

8.   BENEFIT PLANS

     Effective May 14, 1999, the Company 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
     non-collectively 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 NYSEG. 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, 2001, the Plan was funded to the extent required by Internal
     Revenue Code (IRC) Section 412 minimum funding and the requirement of IRC
     Section 404, maximum contribution limits. The Company will make the
     required minimum contribution within the Employee Retirement Income
     Security Act (ERISA) guidelines. Pension benefits are based on years of
     credited service, age of the participant, and average earnings. During 2000
     and 2001, collectively bargained people were offered the opportunity to
     freeze their accrued benefit payable under the Plan and opt into the AES
     Profit Sharing and Stock Ownership Plans.



     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%




                                       31


<PAGE>


<TABLE>
<CAPTION>
     Net benefit cost for the period ended December 31, 2001 and 2000, includes
     the following components (in thousands):

                                                                 2001         2000
                                                               --------     --------
<S>                                                           <C>          <C>
         Service cost                                         $    408     $  1,255
         Interest cost on projected benefit obligation           1,407        1,759
         Expected return on plan assets                           (411)         (75)
         Curtailment gain                                         -          (7,192)
                                                               --------     --------

         Net benefit cost                                     $  1,404     $ (4,253)
                                                               ========     ========

     Change in projected benefit obligation (in thousands):
         Projected benefit obligation, beginning of periods   $ 22,697     $ 28,046
         Service cost                                              408        1,255
         Interest cost                                           1,407        1,759
         Actuarial (gain) loss                                    (803)        (603)
         Benefits paid                                            (317)        (180)
         Curtailment                                              -          (7,580)
                                                               --------     --------

         Projected benefit obligation, end of year/period     $ 23,392     $ 22,697
                                                               ========     ========

     Change in plan assets (in thousands):
         Fair value of plan assets (in thousands):            $  4,105     $   -
         Actual return on plan assets                             (225)          77
         Employer contributions                                  3,199        4,208
         Benefits paid                                            (317)        (180)
                                                               --------     --------

     Fair value of plan assets, end of year                   $  6,762     $  4,105
                                                               --------     --------
     Funded status/accrued benefit liability                  $(16,630)    $(18,592)
                                                               ========     ========
</TABLE>

     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. The accumulated benefit obligation was
     approximately $16.7 million and $17.4 million as of December 31, 2001 and
     2000, respectively.

     During 2000, 137 participants of the Plan opted out and either joined an
     AES Plan, retired, or became terminated. This resulted in a curtailment
     gain to the Plan of approximately $5.3 million. Due to the ACR long-term
     standby status on its Plants, the number of active participants at the
     Jennison and Hickling Plants went from 55 at December 31, 1999 to zero at
     December 31, 2000 and remains zero at December 31, 2001. This resulted in a
     curtailment gain to the Plan of approximately $ 1.9 million. As of December
     31, 2001, the Plan had 101 active participants.

     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.




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<PAGE>


9.   LONG-TERM INCENTIVE PROGRAM

     Stock Option Plan - Employees of the Company participate in the AES Stock
     Option Plan (the SOP) that provides for grants of stock options to eligible
     participants. The following disclosures relate to the Company employees'
     share of benefits under the SOP. Options granted during 2001 and 2000 of
     469,899 and 12,756, respectively, had weighted average fair value of
     approximately $13.52 and $22.50, respectively, using the Black- Scholes
     valuation method. Significant assumptions used in the Black-Scholes
     valuation method for shares granted in 2001 and 2000 were: expected stock
     price volatility of 86% and 48% respectively; expected dividend yield of 0%
     and 0%, respectively; risk-free interest rate of 4.8% and 5.1%,
     respectively; and an expected life of 8 years and 7 years, respectively. No
     options were granted during 1999.

     Outstanding stock options become exercisable on a cumulative basis
     commencing two years from the date of grant and expire ten years after the
     date of grant. As permitted under SFAS No. 123, "Accounting for Stock-Based
     Compensation", AES applies APB Opinion No. 25 in accounting for the SOP. As
     the exercise price of all stock options are equal to their fair market
     value at the time the options are granted, the Company did not recognize
     any compensation expense related to the SOP using the intrinsic value based
     method. Had compensation expense been recognized using the fair value based
     method under SFAS No. 123, the Company's consolidated earnings would have
     decreased by $6,117,979 and $273,368 in 2001 and 2000, respectively.

10.  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, 2001. The Company 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 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.


12.  SUBSEQUENT EVENTS


     AES contributed approximately $1.2 million to AEE in January 2002, related
     to the construction of the SCR on Unit 1 of Cayuga, which became
     operational on June 7, 2001.

     On February 19, 2002, AES announced that it intends to reposition itself in
     the electric business by fully contracting or divesting its merchant
     generation businesses. AES stated that it made this decision to reduce
     earnings volatility and strengthen its balance sheet. The Company is one of
     the merchant generating businesses. The Company's business could be fully
     contracted if we were to sign one or more long-term power sales agreements
     for the output of its Plants. As of the date of this Annual Report on Form
     10-K, no specific proposal to fully contract or divest the Company's
     operations is under consideration. The Company is adopting a policy of not
     commenting on proposed transactions and it disclaims any obligation to
     provide information with respect to proposed transactions until a
     definitive agreement has been reached.








                                       33


<PAGE>


                                                                    Exhibit 12.1


                            AES Eastern Energy, L.P.
             Statements Regarding Ratio of Earnings to Fixed Charges
       YEAR ENDED DECEMBER 31, 2001, YEAR ENDED DECEMBER 31, 2000, AND THE
         PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
                  (Amounts in Thousands, Except Ratio Amounts)



<TABLE>
<CAPTION>
                                                                                        Period From
                                                                                        May 14, 1999
                                               Year Ended           Year Ended          (Inception)
                                            December 31, 2001    December 31, 2000    through December 31, 1999
                                           ------------------    -----------------    ----------------

<S>                                        <C>                   <C>                  <C>
Income from Continuing Operations            $    51,865           $    98,237          $   24,415

Add:  Fixed Charges                               58,434                57,314              38,906
Add:  Amortization of Capitalized Interest          -                      173                  95
Less: Interest Capitalized                          -                     -                 (5,187)
                                               ---------             ---------           ----------

Earnings                                         110,299               155,724              58,229
                                               ---------             ---------           ----------

Fixed Charges:
Add:  Interest expense and
      capitalized amounts (including
      construction related fixed
      charges)                                    58,434                57,314              33,719
Add: Interest capitalized                           -                     -                  5,187
                                               ---------             ---------           ----------

Total Fixed Charges                          $    58,434           $    57,314          $   38,906
                                               =========             =========           ==========

Ratio of Earnings to Fixed Charges                  1.89                  2.72                1.50
                                               =========             =========           ==========
</TABLE>








                                       34


<PAGE>


                                                                    Exhibit 24.1




                                POWER OF ATTORNEY

         The undersigned, acting in the capacity or capacities stated opposite
their respective names below, hereby severally constitute and appoint Jennifer
Lowry, William R. Luraschi and Peter K. Ingerman and each of them with full
power to act alone, our true and lawful attorneys and agents to do any and all
acts and things and to execute any and all instruments which they deem necessary
or advisable for AES NY, L.L.C., a Delaware limited liability company ("AES
NY"), acting in its capacity as general partner of AES Eastern Energy, L.P., a
Delaware limited partnership ("AES Eastern"), to enable AES Eastern to comply
with the Securities Exchange Act of 1934, as amended, in connection with the
execution and filing of the Annual Report on Form 10-K of AES Eastern for the
year ended December 31, 2001 and any related registration statements,
amendments, post-effective amendments or supplements thereto, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign the name of the AES NY, for itself or as general partner
of AES Eastern, and the names of the undersigned directors and officers in the
capacities indicated below.

         This Power of Attorney may be executed in counterparts, which together
shall constitute one and the same instrument.

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


/s/ Dan Rothaupt      President (chief executive officer) and     March 29, 2002
-------------------   Class A Director of AES NY, L.L.C.
    Dan Rothaupt


/s/ Barry J. Sharp    Class A Director of AES NY, L.L.C.          March 29, 2002
-------------------
    Barry J. Sharp


/s/ Roger F. Naill    Class A Director of AES, NY, L.L.C.         March 29, 2002
-------------------
    Roger F. Naill


/s/ Amy Conley         Vice President and Treasurer               March 29, 2002
--------------------   (principal financial officer)
    Amy Conley         of AES NY, L.L.C.













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