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, 2000
                        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. NYSEG and
many other integrated electric utilities in New York and elsewhere in the United
States have sold or announced plans to sell electricity generating assets in
response to state regulatory initiatives which favor more decentralized
ownership of electricity generating, transmission and distribution assets. The
purchase of these assets from NYSEG is an element of The AES Corporation's
overall strategy to be a major participant in the newly competitive and
deregulated markets for electricity, principally through the purchase of
strategically significant regional generating assets.

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

         We operate our electricity generating stations through our wholly owned
subsidiaries. The Westover Generating Station and the Greenidge Generating
Station are owned by 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.

         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



<PAGE>


         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
         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
         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 will negatively affect our
         operating results.

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

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

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

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

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

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

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




                                       2
<PAGE>


    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:

                               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, incorporated under the laws of Delaware in 1981
and headquartered in Arlington, Virginia, is a 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, India, 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




                                       3
<PAGE>


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 is dedicated to providing
electricity worldwide in a socially responsible way.

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


         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




                                       4
<PAGE>


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.

         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.

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

         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, 2001, our ability to
sell electric energy into neighboring markets may also be limited because we are
required to offer to sell our electric energy in the New York market for the
delivery of electric energy on the following day because we have sold our
installed capacity to NYSEG pursuant to a capacity purchase agreement.

         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"), an Annapolis, Maryland-based subsidiary of
Gener S.A., a Chilean independent power producer listed on the New York Stock
Exchange. 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 will make 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 will provide 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




                                       5
<PAGE>


markets. 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, swap and physical values with counter-parties
and provide daily financial reporting, 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.

         Installed Capacity Market. A market in which electricity generators can
sell commitments of their installed generating capacity has been established to
ensure there is enough generation capacity to meet retail demand and ancillary
service requirements. Any load serving entity, i.e., an entity selling electric
energy to consumers of electric energy, including regulated distribution
utilities, municipalities and energy supply companies, is required to procure
capacity commitments sufficient to meet its capacity requirements based on its
forecasted annual requirements at times of maximum usage plus a reserve
requirement. Initially, each load serving entity is required to purchase
installed capacity commitments equal to 118% of its forecasted annual maximum
usage (which translates into a 22% control area reserve margin). The load
serving entity can secure these capacity commitments through a bilateral
contract or through installed capacity auctions. Any capacity commitment which
is not procured locally needs to satisfy the requirement that, as an import, it
does not violate transmission constraints.

         Suppliers of installed capacity are not required to supply the
associated electric energy to the load serving entity with whom they have a
contract to provide installed capacity. For reliability reasons, the New York
ISO requires that electricity generators that sell installed capacity into New
York must make their electric energy available in the event of a system
emergency. This prevents generators from entering into firm contracts to sell
electric energy into one market and installed capacity into another. If the
installed capacity supplier's offer in the electric energy market for delivery
on the following day is not accepted, the installed capacity supplier, for the
next day, will be free either to offer




                                       6
<PAGE>


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. The parties performance under the agreement commenced on May 14,
1999 and will terminate on April 30, 2001, or earlier in accordance with the
agreement. AES NY, L.L.C. assigned this agreement to us insofar as it relates to
our electricity generating stations.

         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.

         Interconnection. Western and central New York are relatively
unattractive markets for the transmission of imported power due to the low
generation costs of existing facilities and low on-peak electric energy prices
relative to the area's adjacent markets, the New England power pool, the
Pennsylvania-New Jersey-Maryland power pool and eastern New York. On the export
side, the New England power pool and the Pennsylvania-New Jersey-Maryland power
pool




                                       7
<PAGE>


forecast higher demand growth for their markets. Furthermore, the existing
transmission infrastructure permits us to access these neighboring markets,
subject to constraints imposed by capacity limitations and reliability
considerations and subject to our obligation to offer to sell our electric
energy in the New York market for the delivery of electric energy on the
following day during the term of the capacity purchase agreement with NYSEG in
accordance with the rules of the New York ISO.


         Fuel Supply

         Our electricity generating stations are located in close proximity to
important coal producers. In addition, both the Somerset Generating Station and
the Cayuga Generating Station are equipped with flue gas desulfurization systems
which allow the plant to burn less expensive medium- and high-sulfur coal while
staying within 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 flue gas desulfurization systems, the high sulfur content of the
coals from the Pittsburgh Seam have historically made coal-fired generating
stations equipped with flue gas desulfurization systems the primary market for
Pittsburgh Seam producers. Since both the Somerset Generating Station and the
Cayuga Generating Station have installed flue gas desulfurization systems and
are capable of burning higher sulfur coals, we expect to maintain a fuel cost
advantage over competitors without flue gas desulfurization systems.

         Approximately 100% of the Somerset Generating Station's and
approximately 70% of the Cayuga Generating Station's coal requirements 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.

         The Greenidge Generating Station and the Westover Generating Station
rely on spot market purchases of medium-sulfur coal.

         The Electricity Generating Stations

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

         The Somerset Generating Station

         The Somerset Generating Station is the largest and newest of our
electricity generating stations and is located northeast of Niagara Falls,
alongside the southern shore of Lake Ontario near Barker, New York. There is a
single operating unit at the Somerset Generating Station, which began generating
electricity in 1984. The maximum net generating capacity of the Somerset
Generating Station is 675MW.

         The Somerset Generating Station currently operates at operating costs
at which it can be run economically even at times of minimum demand for electric
energy. The Somerset Generating Station also is capable of burning low cost
medium- and high-sulfur coal as a result of being equipped with a flue gas
desulfurization system and a selective catalytic reduction system. When the
Somerset Generating Station is not being dispatched at maximum load, its
periodic load can be varied to both meet system load demand and provide
transmission system support and the plant can provide both operating




                                       8
<PAGE>


reserves that are available immediately or on ten minutes notice.

         The Cayuga Generating Station

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

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

         Westover Generating Station

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

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

         Greenidge Generating Station

         The Greenidge Generating Station is located on the west shore of Seneca
Lake adjacent to the village of Dresden, New York, and began generating
electricity in 1938. Units 1 and 2 have been retired and physically removed. The
Greenidge Generating Station presently consists of two units, Unit 3 and Unit 4,
with a combined maximum net generating capacity of 161MW.

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




                                       9
<PAGE>


both the federal and state level to deregulate certain aspects of the electric
generation industry, we currently remain subject to extensive regulation.

         Federal Energy Regulation

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

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

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

         State Regulation. In New York State, recent legislation has
significantly deregulated the rate setting aspects of the industry. However,
significant risks remain, including, but not limited to, the potential that the
state deregulation initiatives are not implemented in the manner anticipated by
us or that they could be reversed or nullified. We have obtained authorization
from the New York State Public Service Commission for the issuance of the pass
through trust certificates and the incurrence of debt pursuant to the recently
terminated working capital credit facility with Credit Suisse First Boston. We
have also requested approval of our new working capital facility.

         Lease Transactions Filings and Approvals. As conditions to completion
of the lease transactions relating to the Somerset Generating Station and the
Cayuga Generating Station, we and the appropriate financial participants in the
lease transactions were required to obtain certain approvals from FERC. We
obtained all of our approvals, including authorization to sell wholesale
electric energy under our market-based rate schedule and related waivers and
blanket authorization. We believe that the special purpose business trusts have
obtained all energy-related approvals required to be obtained by them. The
special purpose




                                       10
<PAGE>

business trusts have been included in the approval by FERC of the transfer of
jurisdictional facilities and the acquisition and leaseback of
FERC-jurisdictional facilities, and FERC has granted a disclaimer of
jurisdiction over each of the institutional investors and the special purpose
business trusts and the trustees of those trusts as public utilities under Part
II or III of the Federal Power Act. The special purpose business trusts have
received determinations from FERC that they are exempt wholesale generators. The
special purpose business trusts obtained a no-action letter from the SEC staff
that no enforcement action would be recommended against them under PUHCA if they
proceeded with the lease transactions prior to obtaining exempt wholesale
generation determinations from FERC.

         Environmental Regulatory Matters

         General

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

    o    the identification, generation, storage, handling, transportation,
         disposal, 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.

         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 Generating Station selective catalytic reduction system, including
the construction of new landfill space to manage ash from selective catalytic
reduction system operations, and the construction of a selective catalytic
reduction system on Cayuga Generating Station Unit 1, and possible expenditures
for a selective catalytic reduction system on Cayuga Generating Station Unit 2,
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




                                       11
<PAGE>

fired electric generating units producing electricity for sale. Power plants
subject to Title IV are required to obtain acid rain permits, to hold sufficient
emission allowances to cover their SO2 emissions, and to comply with various
monitoring and record-keeping requirements. The federal SO2 requirements are
implemented in two phases--Phase I applies to the 110 plants listed in section
404 of the Act and Phase II generally affects all other electric generating
plants selling over 25MW to the electricity distribution grid. Phase I of the
federal Clean Air Act Amendments SO2 program went into effect January 1, 1995,
with Cayuga Generating Station Unit 1 and Unit 2 and Greenidge Generating
Station Unit 4 falling under the program. Phase II went into effect January 1,
2000 and affects all units.

         Flue gas desulfurization systems or "scrubbers" are operated at both
the Somerset Generating Station and the Cayuga Generating Station to reduce
total SO2 emissions from these plants to quantities substantially below the
Title IV SO2 "allowance" allocations for the units at these plants. An allowance
is a freely transferable right to emit one ton of a substance, in this case,
SO2. The excess allowances are accumulated and can either be used for our other
electricity generating stations or sold to provide liquidity to us. We may sell
SO2 allowances rather than save them for Phase II of Title IV of the federal
Clean Air Act Amendments. During Phase II, we may need to purchase SO2
allowances to cover SO2 emissions for the Greenidge Generating Station and the
Westover Generating Station. Market prices for SO2 allowances currently range
from $145 to $175 per ton. We believe that, with operational changes and
additional expenditures, we could lower the shortfall of SO2 allowances for the
stations. We were net sellers of NOX allowances in 2000 and are also expected to
have a surplus of NOX allowances in 2001. We were self sufficient with respect
to SO2 allowances in 2000, however it is expected that we may have a shortfall
of approximately 10,000 to 13,000 SO2 allowances in 2001 assuming the units are
operated at capacities similar to 2000. At current market prices, it may cost
upwards of $1.75 million to $2.275 million to purchase sufficient SO2 allowances
for 2001.

         On October 14, 1999, New York Governor Pataki announced a new
initiative which directs the New York State Department of Environmental
Conservation to issue regulations requiring electric generators to reduce SO2
emissions by another 50% below Phase II standards. The Governor is calling for
the new regulations to be phased in starting on January 1, 2003 with
implementation completed by January 1, 2007. If implemented, the Governor's
initiative has the potential to require further SO2 reductions at our electric
generating stations and may necessitate that either additional SO2 emission
controls be installed, lower sulfur coal be utilized or surplus SO2 allowances
be purchased. We are not currently in a position to quantify the potential costs
of complying with the Governor's SO2 initiative; however, the costs of
compliance could be substantial. The New York State Department of Environmental
Conservation is expected to propose a rule in 2001 to implement the Governor's
initiative.

         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 the Westover and Greenidge Generating Stations. On
January 13, 2000, we received a subpoena from the New York State Department of
Environmental Conservation seeking similar operating and maintenance history for
all four of our electricity generating stations. 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 electric generation stations in New York which are
suspected of undertaking modifications in the past (from as far back as 1977)
without undergoing an air permitting review. Both the Governor's initiative and
the Attorney General's and the Department of Environmental Conservation's
investigations have the potential of triggering further emission reductions at
our plants and possibly resulting in the necessity of installing additional
emissions control equipment.

         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 the
Cayuga and Somerset Generating Stations. 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.




                                       12
<PAGE>


         By letter dated May 25, 2000, the New York State Department of
Environmental Conservation 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 Generating Stations 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 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 NOV on our financial condition or results of future
operations. It is possible that the Department of Environmental Conservation NOV
and other potential enforcement actions arising out of the Attorney General,
Department of Environmental Conservation, 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. The Somerset, Cayuga, Greenidge and Westover Generating Stations
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 selective catalytic reduction system at the Somerset Generating
Station which became operational in June 1999.

         The Somerset Generating Station generated approximately 2500 excess
allowances in 1999 and 2000, and should continue this in 2001 and 2002. The
Cayuga Generating Station is expected to accumulate approximately 600 excess
allowances per year on Unit 1 during the 2001-2002 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 or
trading of excess allowances. This includes trades between our electricity
generating stations as needed to offset NOX emissions. During 2000, we were a
net seller of NOX allowances, and we expect to be a net seller during 2001.

         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 selective catalytic reduction system at the Cayuga
Generating Station in order to continue operation of each of our electricity
generating stations at full planned capacity factors during Phase III. We are
also considering other compliance strategies and control technologies.

         New York Governor Pataki's October 14, 1999 initiative also directs the
New York State Department of Environmental Conservation to issue regulations
requiring electric generators




                                       13
<PAGE>

to impose stringent NOX reduction requirements on a year-round basis, rather
than just during the summertime ozone season. The Governor has called for the
new regulations to be in effect starting on January 1, 2003. If implemented, the
Governor's initiative has the potential to require further NOX emission
reductions at our electricity generating stations and may necessitate the
installation of additional emissions control equipment at certain stations.

         The capital cost of the Somerset Generating Station selective catalytic
reduction system was $31 million. We expect that the system will operate for 20
years at which time we will need to replace the catalyst at an estimated cost of
$4.5 million in 1999 dollars. The capital cost of the Cayuga Generating Station
selective catalytic reduction system on Unit 1 will be $11.2 million. We expect
that the system will operate for 20 years with catalyst replacement capital
costs of $325,000 every four years.

         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.

         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.

         Over a year ago we received a draft consent order from the New York
State Department of Environmental Conservation that alleges violations of the
opacity emission limitations in the air permits for the Cayuga, Westover, and
Greenidge Generating Stations occurring since our electricity generating
stations were purchased from NYSEG. The draft consent order would require us to
prepare an opacity compliance plan and would impose penalties for opacity
violations occurring after May 14, 1999, the date of the acquisition. We expect
to enter a final consent order with the Department of Environmental Conservation
late in 2001. AES NY, L.L.C. also received notice from NYSEG that NYSEG has
received a draft consent order from the Department of Environmental Conservation
seeking penalties primarily for opacity violations occurring prior to May 14,
1999. In the notice, NYSEG asserts that it will seek indemnification from AES
NY, L.L.C. for any penalties, attorney fees, and related costs that it incurs in
connection with the consent order. We and AES NY, L.L.C. have denied liability
for the pre-closing violations and intend to vigorously defend this claim if
NYSEG pursues litigation or arbitration.

         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.




                                       14
<PAGE>


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

         Water Issues

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

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

         Hazardous Material and Wastes

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

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

         In October 1999, AES Creative Resources, L.P. entered into a consent
order with the New York State Department of Environmental Conservation 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




                                       15
<PAGE>


some groundwater remediation at the site may be required. Further compliance
with this order included a Closure Investigation Report which was submitted to
the New York State Department of Environmental Conservation in the spring of
2000, and a Closure Plan which was submitted to the New York State Department of
Environmental Conservation in January 2001. The latest part of the consent order
will be implemented during the 2001 spring/summer construction season when the
work scope for covering the site and carrying out the future monitoring of the
site per the Closure Plan will be implemented. AEE2, L.L.C. will contribute
two-thirds of the costs to close the landfill, which are anticipated to be
approximately $3 million, as well as additional costs for long-term groundwater
monitoring. While the actual closure costs may exceed $3 million, we do not
expect any added closure costs to be material. Nevertheless, if a groundwater
remediation is required, these costs have not been budgeted, and AEE2, L.L.C.
may be responsible for a portion of such costs.

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

         Because the new selective catalytic reduction system at the Somerset
Generating Station may result in ammonia-contaminated fly ash, we expect to
develop a new area, Area 3, of the on-site landfill located at the Somerset
Generating Station to contain the ammoniated ash. Area 3 will also be used for
disposal of ammoniated sludge produced during flue gas desulfurization system
operation while the selective catalytic reduction system is also in operation
(May 1 to September 30). Area 3 will comply with modern landfill design and
performance standards and will be built with a synthetic liner and a leachate
collection system. On April 26, 1999, the New York State Board on Electric
Generation Siting and the Environment approved the plan to use Area 3, subject
to approval by the New York State Department of Environmental Conservation of
more detailed design submissions, and approved the use of the lined coal pile
storage area for the temporary storage of the ammoniated ash. The Department of
Environmental Conservation 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 selective catalytic reduction system at Somerset qualifies as
non-ammoniated. The Department of Environmental Conservation approved disposal
of non-ammoniated waste material generated during the operation of the selective
catalytic reduction system in Area 1. We are working with the Department of
Environmental Conservation to complete an approved design for the Area 3
expansion. The existing Cayuga Generating Station 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 selective catalytic reduction system for 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 New York State Department of Environmental Conservation. Each
area was to receive a separate landfill unit lined with a low permeability
material, usually clay. However, the first 17-acre section of Area 1 of the
landfill was lined with compacted soil only. 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
Department of Environmental Conservation has modified its solid waste landfill
regulations extensively. As a result of these changes, these regulations
currently allow construction or expansion of landfills only with low
permeability liners and sophisticated leachate collection systems, and impose
higher standards for capping and closing solid waste facilities.

         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




                                       16
<PAGE>


consultants to perform groundwater testing using sophisticated geochemical
fingerprinting techniques, which distinguish the major ions of a water sample.
NYSEG's consultants have shown, to the satisfaction of the Public Service
Commission, that there has been no material release of leachate from Area 1 into
the groundwater.

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

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

         Exceedences of state groundwater standards at the Cayuga Generating
Station were reported in the vicinity of the coal pile area, the coal pile
runoff pond, and the ash disposal site. In 1997, a new liner was installed under
the coal pile which brought the Cayuga Generating Station 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 the Somerset Generating Station
contains a number of requirements for mitigating environmental impacts from the
facility, including noise impacts. Among the noise requirements was an
obligation to obtain noise easements from neighboring landowners or, as
subsequently approved by the Public Service Commission, to purchase their
property in a buffer zone where noncompliance with noise standards was expected
to occur. Subsequent analyses predicted that these exceedences would occur only
in connection with ash disposal operations when Area 2 of the Somerset landfill
was constructed. Prior to the acquisition of our electricity generating
stations, NYSEG had purchased neighboring properties for a combined cost
totaling approximately $1.5 million and had a standing offer to purchase the
remainder. We obtained an appraisal of the remaining properties which places
their aggregate current value at approximately $3.1 million. We have not
budgeted any amount for the acquisition of these properties. The Public Service
Commission




                                       17
<PAGE>


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 2000, we employed 292 people who operate our electricity
generating stations. The International Brotherhood of Electrical Workers (the
"IBEW") represents hourly labor at the Somerset Generating Station, the Cayuga
Generating Station, the Westover Generating Station and the Greenidge Generating
Station. The IBEW represents approximately 240 workers. Pursuant to the terms of
the Asset Purchase Agreement with NYSEG, we (as assignee) were required to offer
employment to substantially all of the people employed by NYSEG at our
electricity generating stations. We were also required to assume the collective
bargaining agreement for our electricity generating stations between NYSEG and
the IBEW. The term of the collective bargaining agreement ended on June 30, 2000
and new Collective Bargaining Agreements have been negotiated 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 retained a substantial
majority of the NYSEG workforce at each of the electricity generating stations.
We believe that relations with the people employed at our electricity generating
stations are satisfactory.




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

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 the Westover and Greenidge Generating Stations. On January 13, 2000,
we received a subpoena from the New York State Department of Environmental
Conservation seeking similar operating and maintenance history for all four of
our electricity generating stations. 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 the Cayuga and Somerset Generating Stations. 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 New York State Department of
Environmental Conservation 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 Generating Stations 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 Department of
Environmental Conservation. We are unable to estimate the effect of this NOV on
our




                                       19
<PAGE>


financial condition or results of future operations. It is possible that the
Department of Environmental Conservation NOV and other potential enforcement
actions arising out of the Attorney General, Department of Environmental
Conservation, 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.

         Over a year ago we received a draft consent order from the New York
State Department of Environmental Conservation that alleges violations of the
opacity emission limitations in the air permits for the Cayuga, Westover, and
Greenidge Generating Stations occurring since 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 Department of Environmental Conservation
late in 2001. AES NY, L.L.C. also received notice from NYSEG that NYSEG has
received a draft consent order from the Department of Environmental Conservation
seeking penalties primarily for opacity violations occurring prior to May 14,
1999. In the notice, NYSEG asserts that it will seek indemnification from AES
NY, L.L.C. for any penalties, attorney fees, and related costs that it incurs in
connection with the consent order. We and AES NY, L.L.C. have denied liability
for the pre-closing violations and intend to vigorously defend this claim if
NYSEG pursues litigation or arbitration.


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

         Not applicable.




                                       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,                                             2000            1999
---------------------------------------------------- ------------------ ------------------
<S>                                                  <C>                <C>
Balance Sheet Data (in millions)
Total Assets                                                 $1,185          $1,133
Long Term Liabilities                                        $  678          $  692
Partners' Capital                                            $  442          $  378

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

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

Statement Of Income Data (in millions)
Operating Revenue                                             $388            $185
Operating Income                                              $151            $ 57
Net income                                                    $ 98            $ 24

</TABLE>




                                       21
<PAGE>


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

         General

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

         All four of our electricity generating stations operate as merchant
plants, which means that we 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.

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

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

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

         Our electricity generating stations have historically been available to
run a high percentage of the time due to the regulated utility-grade nature of
their design and construction. In 2000 and 1999, the stations had a weighted
average (based on capacity) equivalent availability factor of 94% and 97%,
respectively (excluding the outage at the Somerset Generating Station during May
and June 1999). Based upon the historical experience of The AES Corporation, we
believe that we can maintain or improve the availability of our electricity
generating stations.

         At the Cayuga Generating Station, we are currently planning major
maintenance outages of approximately 30 days each for Unit 1 in 2001 and Unit 2
in 2002. We will schedule these outages to avoid expected seasonal peaks in
demand for electric energy and we will schedule these outages to coincide with
normal, annual 10 to 14 day maintenance outages. We expect that there will be no
significant impact on our results of operations from these major maintenance
outages.




                                       22
<PAGE>


         We also derive revenue from sales of installed capacity and ancillary
services. Under the terms of the capacity purchase agreement with NYSEG, NYSEG
will purchase all of our 1,268MW of installed capacity at a price of $68 per
MW-day until April 30, 2001. After April 30, 2001 we can sell our installed
capacity through the over the counter market or the New York ISO auction market
for installed capacity. The rules of the New York ISO system currently require
installed capacity suppliers to offer to sell their electric energy in the New
York market for delivery of electric energy on the following day. We are
permitted to export electric energy when the energy is not needed in the New
York market. However external energy sales by generators that have sold their
installed capacity in New York are subject to recall for use in New York without
advance notice.

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

         Results of Operations

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

         Energy revenue results from sales of electric energy into the New York
power market and adjoining power pools. Capacity revenue results from our
commitment of our generating capacity to NYSEG under the capacity purchase
agreement that we entered into with NYSEG to satisfy NYSEG's requirement to
procure capacity commitments sufficient to meet its forecasted peak demand plus
a reserve requirement. Other revenue in the period ended December 31, 1999
resulted mainly from the sale of credits for the emission of nitrogen oxides. We
recorded a net asset and a gain of approximately $24.9 million in the fourth
quarter of 2000 related to a transmission agreement with Niagara Mohawk Power
Corporation (see Note 7 to our financial statements). Other revenue for the year
ended December 31, 2000 includes a net gain of approximately $5.3 million
relating to curtailment of the defined benefit pension plan for collectively
bargained people (see note 9 to our financial statements).

         For the year ended December 31, 2000 and the period from May 14, 1999
(inception) to December 31 1999, we generated revenues of $323 million and $163
million, respectively, from sales of electricity and $32 million and $18
million, respectively, from the capacity purchase agreement with NYSEG. The
increase in revenue in 2000 is primarily due to a full year of operations
combined with higher energy prices. Operating expenses totaled $236 million and
$128 million, respectively, primarily due to fuel cost for electric generation
of $132 million and $71 million, respectively. The increase in operating
expenses in 2000 is primarily due to a full year of operations. In addition, the
Somerset Generation Station incurred fixed charges associated with the Niagara
Mohawk Power Corporation transmission agreement of $6.1 million. Net interest
expense was $53 million and $33 million, respectively. Our net income was $98
million and $24 million, respectively.

         The Somerset Generating Station was taken out of service from May 14,
1999 to June 28,




                                       23
<PAGE>


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

         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 the exchange
offer for the pass through trust certificates. We paid approximately $229,000
additional interest per month during this period.

         Liquidity and Capital Resources

         The leases for the Somerset Generating Station and the Cayuga
Generating Station require that we make fixed semiannual payments of rent on
each January 2 and July 2 during the terms of the leases commencing on January
2, 2000 in amounts calculated to be sufficient (1) to pay principal and interest
when due on the secured lease obligation notes issued by the special purpose
business trusts that own and lease to us the Somerset Generating Station and the
Cayuga Generating Station and (2) to pay the economic return of the
institutional investors that formed the special purpose business trusts. Our
rent obligation(which includes deferrable amounts) under the leases was $36.5
million for 1999 and $59.8 million for 2000 and is $60.5 million for 2001, $60.5
million for 2002, $60.5 million for 2003, $60.5 million for 2004, $59.5 million
for 2005 and a total of $1,347.3 million for the years thereafter. For purposes
of the minimum rent obligations described in the preceding sentence, we treated
the semiannual rent payments that are due on January 2 of each year as though
they would be paid in the preceding year. You can find information concerning
our minimum rental obligations that treats rent payments as obligations for the
years in which they are due in the notes to our audited financial statements
which are included in this Annual Report on Form 10-K. Through July 2, 2020 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. We have not
deferred any rent obligations to date. In addition, we are required to maintain
a rent reserve account equal to the maximum semiannual payment with respect to
the sum of basic rent (other than deferrable basic rent) and fixed charges
expected to become due on any one basic rent payment date in the immediately
succeeding three-year period. The amount of the rent reserve account required
currently is $29 million. We will also be obligated to make payments under the
coal hauling agreement with 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.

         We incurred approximately $20.8 million and $64.2 million in capital
expenditures with regard to our assets for the years ended December 31, 2000 and
1999, respectively. We will make capital expenditures thereafter according to
the life extension program to be implemented at our electricity generating
stations. The average capital expenditures to be made under the program are
$11.9 million per year. We have budgeted capital expenditures totaling $18.2
million for 2001, $10.4 million for 2002, $4.4 million for 2003, $3.5 million
for 2004 and a total of $335 million for the remaining years through 2032. These
amounts include approximately $11.2 million to install a selective catalytic
reduction system to reduce NOX emissions at the Cayuga Generating Station during
a scheduled outage in 2001. In




                                       24
<PAGE>

addition to capital requirements associated with the ownership and operation of
our electricity generating stations, we will have significant fixed charge
obligations in the future, principally with respect to the leases.

         Compliance with environmental standards will continue to be reflected
in our capital expenditures and operating costs. Based on the current status of
regulatory requirements and, other than the expenditures for a selective
catalytic reduction system at the Somerset Generating Station, including the
construction of new landfill space to manage ash from selective catalytic
reduction system operations, construction of a selective catalytic reduction
system at Cayuga Generating Station Unit 1 and possible expenditures for a
selective catalytic reduction system at Cayuga Generating Station Unit 2, 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, 2000 and 1999 was $83 million
and $47 million, respectively. No amounts were borrowed under the working
capital credit facility with Credit Suisse First Boston at December 31, 2000.
During 1999 and 2000, we made two borrowings under this 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. This facility was
terminated as of March 9, 2001. We are currently finalizing the terms and
conditions of a $35 million secured revolving working capital and letter of
credit facility with Union Bank of California, N.A. This facility will have 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.

         The outage at the Somerset Generating Station for almost the entire
period from May 14, 1999 to June 30, 1999 did not impair our ability to meet our
obligations during this period. Subsequent to this outage, our four electricity
generating stations are all available for service and are being dispatched to
generate electricity when market conditions warrant.

         Cash flow from our operations was sufficient to cover aggregate rental
payments under the leases for the Somerset Generating Station and the Cayuga
Generating Station on the rent payment dates of January 2, 2000, July 2, 2000
and January 2 2001. 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 new $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. In the event of a
shortfall between the amount of our commitments and the foregoing sources of
funds, the shortfall may be made up by loans or equity contributions from The
AES Corporation, but there can be no assurances that The AES Corporation would
decide to provide a loan or equity contribution.

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

         Our ability to make distributions to the partners of our company is
restricted by the terms of the agreements governing the leases for the Somerset
Generating Station and the Cayuga Generating Station. We may make distributions
only on or within 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.




                                       25
<PAGE>


         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.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

         We are exposed to market risks associated with commodity prices. We
often utilize financial instrument contracts to hedge against such fluctuations.
We utilize financial and commodity derivatives solely 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, 2000 and
1999 was $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. At no date during 2000 or 1999 was the daily VaR amount greater
than it was a 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:




                                       26
<PAGE>


AES EASTERN ENERGY, L.P.

Independent Auditors' Report

Financial Statements:

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

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

Independent Auditors' Report

Financial Statements:

         Consolidated Balance Sheets as of December 31, 2000 and 1999
         Notes to Consolidated Balance Sheets

*    The 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 1, 2001.

         Name                      Age      Position

         Dan Rothaupt              49       General Manager
         John Ruggirello           50       Assistant General Manager
         Richard Santoroski        36       Manager of Marketing
         Harry Lovrak              50       Somerset Plant Manager
         Jerry Goodenough          36       Cayuga Plant Manager
         James Mulligan            52       Westover Plant Manager
         Douglas Roll              45       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 10 years. In addition to AES Thames, he has managed
a number of complex operations including the startup of The AES Corporation's
business in




                                       27
<PAGE>


Hawaii with its coal-fired Barbers Point facility. Mr. Rothaupt has a proven
track record of reducing costs while organizing The AES Corporation's businesses
at various locations in the United States and has 25 years experience working in
various aspects of power systems. Mr. Rothaupt is General Manager of our
company. Mr. Rothaupt has a Bachelor of Science degree in Mechanical Engineering
from the United States Coast Guard Academy.

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

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

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

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

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

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




                                       28
<PAGE>


         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, John Ruggirello and Dan Rothaupt, each elected by the members of
the limited liability company. The business and affairs of AES NY, L.L.C. are
managed by the Class A Directors. The Class B Director's only participation in
the management of AES NY, L.L.C. is in matters of bankruptcy or related matters.
Mr. Rothaupt is also the President of AES NY, L.L.C.

         Dr. Roger F. Naill, 52 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.

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

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

      Independent Auditors' Report

      Financial Statements:

              Consolidated Balance Sheets as of December 31, 2000 and 1999
              Notes to Consolidated Balance Sheets

      *   The 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




                                       29
<PAGE>


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

     (3) Exhibits

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

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

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

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

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

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

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

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

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

         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*




                                       30
<PAGE>


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

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

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

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

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

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

         4.10                  [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




                                       31
<PAGE>


                               Transaction Agreement, between AES Eastern Energy
                               and NYSEG Solutions, Inc., dated as of May 14,
                               1999*

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

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

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

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

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

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

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

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

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

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

         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,




                                       32
<PAGE>


                               dated as of May 7, 1999*

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

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

         10.20                 Amendment No. 1 dated as of April 12, 2000 to
                               Deposit and Disbursement Agreement

         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

         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.

(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, 2000.




                                       33
<PAGE>


                                  SIGNATURES

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

Date:  March 29, 2001

                                   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, 2001
---------------------   and Class A Director of AES NY, L.L.C.
Dan Rothaupt


/s/ John Ruggirello     Vice President and Class A Director of   March 29, 2001
---------------------   AES NY, L.L.C.
John Ruggirello


/s/ Roger F. Naill
---------------------
Roger F. Naill          Class A Director of AES NY, L.L.C.       March 29, 2001


/s/ Michael Romaniw     Vice President and Treasurer             March 29, 2001
---------------------   (principal financial officer)
Michael Romaniw         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.




                                       34
<PAGE>


                          Index to Financial Statements

                                                                          Page
AES EASTERN ENERGY, L.P.

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

Financial Statements:

   Consolidated Balance Sheets.......................................      F-3

   Consolidated Statements of Income.................................      F-4

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

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

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

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

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

Financial Statements:

   Consolidated Balance Sheets........................................     F-18

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



*The 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, 2000 and 1999, and the related
consolidated statements of income, changes in partners' capital, and cash flows
for the year ended December 31, 2000 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, 2000 and 1999, and the results of their
operations and their cash flows for the year ended December 31, 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
March 16, 2001




                                      F-2
<PAGE>

<TABLE>
<CAPTION>


                            AES EASTERN ENERGY, L.P.

                           CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
---------------------------------------------------------------------------------------------
December 31,                                                        2000               1999
                                                                    ----               ----

                                     ASSETS
                                     ------
<S>                                                         <C>                <C>
CURRENT ASSETS:
     Restricted cash:
        Operating - cash and cash equivalents                 $     9,924       $      4,200
        Revenue account                                            73,141             48,437
     Accounts receivable - trade                                   33,799             22,481
     Accounts receivable - affiliates                                 571                271
     Accounts receivable - other                                    2,170                322
     Inventory                                                     23,308             27,989
     Prepaid expenses                                               6,152              6,189
                                                              -------------     -------------
          Total current assets                                    149,065            109,889
                                                              -------------     -------------
PROPERTY, PLANT, EQUIPMENT, AND RELATED ASSETS:
     Land                                                           6,877              6,850
     Electric generation assets (net of
        accumulated depreciation of $36,749 and $12,743)          740,909            750,147
     Other intangible assets (net of accumulated
        amortization of ($12,273 and $4,646)                      232,480            236,405
                                                              -------------     -------------
          Total property, plant, equipment and related assets     980,266            993,402
                                                              -------------     -------------
OTHER ASSETS:
     Transmission congestion contract                              24,851               -
     Rent reserve account                                          30,978             29,543
                                                              -------------     -------------
TOTAL ASSETS                                                  $ 1,185,160       $  1,132,834
                                                              =============     =============
</TABLE>
<TABLE>
<CAPTION>

                        LIABILITIES AND PARTNERS' CAPITAL
                        ---------------------------------
<S>                                                         <C>                <C>
CURRENT LIABILITIES:
     Accounts payable                                         $     1,432     $        508
     Lease financing - current                                      1,813              -
     Environmental remediation                                      2,000              -
     Accrued interest expense                                      29,472           38,460
     Due to The AES Corporation                                     8,604            3,250
     Other accrued expenses                                        17,524           12,995
     Other liabilities                                              5,020            7,837
                                                               -------------    -------------
          Total current liabilities                                65,865           63,050
                                                               -------------    -------------
LONG-TERM LIABILITIES:
     Lease financing - long term                                  645,549          650,000
     Environmental remediation                                     10,240           11,080
     Defined benefit plan obligation                               18,781           23,880
     Other liabilities                                              3,267            6,603
                                                               -------------     ------------
          Total long-term liabilities                             677,837          691,563
                                                               -------------     ------------
TOTAL LIABILITIES                                                 743,702          754,613

COMMITMENTS AND CONTINGENCIES (Note 7)

PARTNERS' CAPITAL                                                 441,458          378,221
                                                               -------------    -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                      $  1,185,160    $   1,132,834
                                                               =============    =============
</TABLE>




                                      F-3
<PAGE>

<TABLE>
<CAPTION>
                            AES EASTERN ENERGY, L.P.

                        CONSOLIDATED STATEMENTS OF INCOME

(Amounts in Thousands)
---------------------------------------------------------------------------------------
                                                              Period from May 14, 1999
                                             Year ended         (Inception) through
                                          December 31, 2000       December 31, 1999

<S>                                       <C>                <C>
OPERATING REVENUES:
     Energy                                   $322,677                $162,854
     Capacity                                   31,572                  17,927
     Transmission congestion contract           24,851                    -
     Other                                       8,466                   3,787
                                              ---------               ---------

          Total revenues                       387,566                 184,568
                                              ---------               ---------
OPERATING EXPENSES:
     Fuel                                      131,681                  70,718
     Depreciation and amortization              31,723                  17,389
     Operating and maintenance                  16,761                   7,639
     General and administrative                 56,112                  31,784
                                              ---------               ---------

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

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

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

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

NET INCOME                                    $ 98,237                $ 24,415
                                              =========               =========

</TABLE>

See notes to consolidated financial statements.




                                      F-4
<PAGE>

<TABLE>
<CAPTION>

                            AES EASTERN ENERGY, L.P.

             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

(Amounts in Thousands)
--------------------------------------------------------------------------------



                                                       General        Limited
                                                       Partner        Partner        Total
<S>                                                   <C>          <C>            <C>
BALANCE, MAY 14, 1999                                     -              -            -
     Capital contribution (net of $1.1 million to be
        returned to The AES Corporation, see Note 8)   $ 3,538       $  350,268     $ 353,806

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

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

     Net income for the period ended December 31, 2000     982           97,255        98,237

     Distributions paid during 2000                       (350)         (34,650)      (35,000)
                                                       --------       ---------     ---------

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

</TABLE>



See notes to consolidated financial statements.




                                      F-5
<PAGE>

<TABLE>
<CAPTION>

                            AES EASTERN ENERGY, L.P.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)
--------------------------------------------------------------------------------------------

                                                                    Period from May 14, 1999
                         Year ended (Inception) through
                       December 31, 2000 December 31, 1999
<S>                                                 <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net Income                                       $  98,237              $  24,415
     Adjustments to reconcile net income to
      Net cash used in operating activities:
       Depreciation and amortization                     31,723                 17,389
       Transmission congestion contract                 (24,851)                  -
       Interest income accrued in rent
        reserve account                                  (1,435)                  (870)
       Net defined benefit plan cost                     (2,989)                 1,479
     Changes in current assets and liabilities:
       Accounts receivable - trade                      (13,466)               (23,074)
       Inventory                                          4,681                 (5,055)
       Prepaid expenses                                      37                 (6,189)
       Accounts payable                                     924                    508
       Accrued interest expense                          (8,988)                33,719
       Due to The AES Corporation                         5,354                    -
       Other liabilities                                 (2,817)                 2,687
       Other accrued expenses                             4,529                 12,995
                                                      ---------               ---------
Net cash provided by operating activities                90,939                 58,004
                                                      ---------               ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisition of assets at inception date               -                  (267,424)
     Payments for capital additions                     (20,763)               (64,223)
     Increase in restricted cash                        (30,428)               (52,637)
     Contributions to pension plan                       (2,110)                  -
                                                      ---------              ---------
Net cash used in investing activities                   (53,301)              (384,284)
                                                      ---------              ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Cash capital contributions                            -                   354,953
     Distributions paid                                 (35,000)                  -
     Payments to rent reserve account                      -                   (28,673)
     Principal payments on lease obligations             (2,638)                  -
                                                      ---------              ---------
Net cash (used in) provided by financing activities     (37,638)               326,280
                                                      ---------              ---------

INCREASE IN CASH AND CASH EQUIVALENTS                      -                      -

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

SUPPLEMENTAL DISCLOSURES OF OTHER ACTIVITIES:
  Interest paid (net of amounts capitalized)          $ 59,637               $    -
                                                      =========              =========

</TABLE>

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




                                      F-6
<PAGE>


                            AES EASTERN ENERGY, L.P.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


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 installed capacity
         and ancillary services, directly into the New York Independent System
         Operator (ISO) system, Pennsylvania, New Jersey, Maryland Power Pool
         (PJM), and New England Power Pool (NEPOOL). For Federal regulatory
         purposes, 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 its electricity generating
         stations, the Partnership entered into a two-year agreement for energy
         marketing services with Merchant Energy Group of the Americas, Inc.
         ("MEGA"), an Annapolis, Maryland-based subsidiary of Gener S.A., a
         Chilean independent power producer listed on the New York Stock
         Exchange. MEGA 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 will make four additional payments of
         $225,000 each, from 2002 to 2005 as part of the termination of the
         agreement with MEGA.

         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.

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

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




                                      F-7
<PAGE>

         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 amendment, modification or reallocation
         is based on reasonable assumptions.

         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, 2000 and 1999, consisted of the following
      (in thousands):
                                                          2000           1999
                                                          ----           ----

        Coal and other raw materials                   $  7,353        $ 11,913
        Spare parts, materials, and supplies             15,955          16,076
                                                       --------        --------
         Total                                         $ 23,308        $ 27,989
                                                       ========        ========

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

         Electric generation and intangible assets as of December 31, 2000 and
1999, consisted of the following (in thousands):

                                                           2000           1999
                                                           ----           ----
        Electric generation tangible assets              $777,658      $762,890
        Other intangible assets                           244,753       241,051
        Accumulated depreciation and amortization         (49,022)      (17,389)
                                                         ---------    ---------
        Total                                            $973,389      $986,552
                                                         =========    =========


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




                                      F-8
<PAGE>


         Rent Reserve Account - As part of the Partnership's lease obligation
         (see Note 6), the Partnership is required to maintain a rent reserve
         account equal to the maximum semiannual payment with respect to the sum
         of basic rent (other than deferrable payments) and fixed charges
         expected to become due on any one basic rent payment date in the
         immediately succeeding three-year period. As of December 31, 1999 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 for the year ended
         December 31, 2000 and for the period from May 14 1999, through December
         31, 1999, were approximately $1.4 million and $870,000, respectively,
         and are included in the rent reserve account balance. At December 31,
         1999 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.

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

         Line of Credit Agreement - 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. Amounts outstanding under the working capital facility
         were required to be reduced to zero for thirty days prior to any one
         lease rental payment date in each year. Interest accrued on outstanding
         balances at a base rate plus 1% or the applicable adjusted Eurodollar
         rate plus 1.75%. The working capital credit facility was collateralized
         by a pledge of the Partnership's membership interest in AEE2, L.L.C.
         and by a security interest in equipment and personal property of AEE2,
         L.L.C. During 1999 and 2000, the Partnership made two borrowings under
         this working capital 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. As of December 31, 2000, no
         amounts were outstanding under this credit facility. The Partnership is
         currently finalizing the terms and conditions of a $35 million secured
         revolving working capital and letter of credit facility with Union Bank
         of California, N.A.

         Revenue Recognition - Revenues from the sale of electricity are
         recorded based upon output delivered and rates specified under contract
         terms. Revenue 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.

         New York Transition Agreement - As the New York ISO system represents a
         deregulated environment, the ISO will attempt to ensure stability of
         the power grid in New York by requiring each entity engaged in retail
         sales of electricity to obtain installed capacity commitments from
         generators in an amount equal to the entity's forecasted peak load plus
         a reserve margin. This requirement is intended to ensure that an
         adequate supply of electricity is always available. The General Partner
         entered into a two-year transition agreement with New York State
         Electric & Gas Corporation (NYSEG) pursuant to which the Partnership
         sells its installed capacity to NYSEG in order to permit NYSEG to
         comply with ISO standards for system stability. The transition
         agreement was assumed by the Partnership on the date of acquisition of
         the Plants. The Partnership recognizes revenue under this contract as
         it is earned, which is $68 per MW per day for installed capacity made
         available. This agreement expires on April 30, 2001.




                                      F-9
<PAGE>


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

         Use of Estimates - The preparation of financial statements in
         conformity with generally accepted accounting principles requires the
         Partnership to make estimates and assumptions that affect reported
         amounts of assets and liabilities and disclosures of contingent assets
         and liabilities at the date of the financial statements, as well as the
         reported amounts of revenues and expenses during the reporting period.
         Actual results could differ from those estimates.

         Comprehensive Income - In 1999, the Partnership adopted Statement of
         Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
         Income, which establishes rules for the reporting of comprehensive
         income and its components. The adoption of SFAS No. 130 had no impact
         on the Partnership's financial statements as of December 31, 1999 and
         2000 as it had no 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. SFAS No.
         133 requires that an entity recognize all derivatives (including
         derivatives embedded in other contracts) as either assets or
         liabilities on the balance sheet and measure those instruments at fair
         value. Changes in the derivative's fair value are to be recognized
         currently in earnings, unless specific hedge accounting criteria are
         met. Hedge accounting allows a derivative's gains and losses in fair
         value to offset related results of the hedged item in the statement of
         operations and requires that a company formally document, designate and
         assess the effectiveness of transactions that receive hedge accounting.

         SFAS No. 133 allows hedge accounting for fair value and cash flow
         hedges. SFAS No. 133 provides that the gain or loss on a derivative
         instrument designated and qualifying as a fair value hedge, as well as
         the offsetting gain or loss on the hedged item attributable to the
         hedged risk, be recognized currently in earnings in the same accounting
         period. SFAS No. 133 provides that the effective portion of the gain or
         loss on a derivative instrument designated and qualifying as a cash
         flow hedge be reported as a component of other comprehensive income in
         stockholders' equity and be reclassified into earnings in the same
         period or periods during which the hedged transaction affects earnings.
         The remaining gain or loss on the derivative, if any, must be
         recognized currently in earnings.

         The Partnership utilizes electric derivative financial instruments,
         including swaps, options, and forwards, to manage risk related to
         electricity sales.

         Certain of the Partnership's derivative instruments qualify as cash
         flow hedges, as defined by SFAS No. 133. As required by SFAS No. 133
         for these instruments, the Partnership has documented the effectiveness
         of the hedges by performing tests to demonstrate the high correlation
         between the derivative instruments and the underlying hedged
         transactions or commitments. These effectiveness tests will be updated
         quarterly. Although many of the Partnership's derivative instruments
         qualify as cash flow hedges, adoption of SFAS No. 133 will increase
         volatility in reported earnings.

         Adoption of SFAS No. 133 will result in the recognition of
         approximately $66.5 million of derivative liabilities on the
         Partnership's balance sheet as of January 1, 2001. Additionally,
         adoption of SFAS No. 133 will result in a reduction of other
         comprehensive income of approximately $66.5 million, which will be
         included in the first quarter 2001 balance sheet as a cumulative effect
         of a change in accounting principle. Approximately $26 million of other
         comprehensive income related to derivative instruments as of January 1,
         2001 is expected to be recognized as expense in earnings over the next
         twelve months.




                                      F-10
<PAGE>


         The Partnership adopted Staff Accounting Bulletin No. 101, Revenue
         Recognition in Financial Statements, during the first quarter of 2000.
         The adoption of this standard did not have a significant impact on its
         financial condition or results of operations.

         Reclassifications - Certain reclassifications have been made to the
         1999 financial statements to conform with the 2000 presentation.

3.       ACQUISITION

         On May 14, 1999, the Partnership's four Plants were acquired from NYSEG
         for approximately $914 million. The Partnership's wholly owned
         subsidiary, AEE2, L.L.C., 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 direct financing capital leases (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 remediation for soil and ground water contamination. The
         Partnership engaged another environmental consulting firm to evaluate
         the costs estimated by NYSEG's consultants. The environmental analysis
         and the Partnership's estimate of other environmental remediation costs
         indicated that there existed a range of potential remediation costs of
         between $8.5 million and $19.7 million, with a most probable liability
         of approximately $12 million. The Partnership recorded $12 million as
         an undiscounted liability under purchase accounting for the projected
         remediation cost. As of December 31, 2000, $2 million was classified as
         a current liability. Also in connection with the acquisition, the
         General Partner entered into an agreement for the construction of a
         selective catalytic reduction (SCR) facility at the Somerset Plant. The
         SCR facility is designed to significantly reduce the amount of nitrogen
         oxide emissions from the burning of coal fuel at the Somerset Plant.
         The Partnership acquired the SCR work in progress from the General
         Partner on May 14, 1999, for approximately $31 million, which was the
         contract price for the SCR. Construction of this asset began prior to
         the acquisition of the Plants. On the acquisition date, the Somerset
         Plant was shut down to complete construction and make other
         improvements. The outage lasted until late June 1999. All costs
         associated with the installation of the SCR, including construction and
         engineering costs, wages of people involved in the construction, and
         interest expense during the period were capitalized. The Somerset Plant
         was placed back in service on June 28, 1999.

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

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




                                      F-11
<PAGE>


         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 an entity established to raise a portion of the
         capital contributed to the Partnership through the General Partner and
         the Limited Partner. AES Funding is a direct wholly owned subsidiary of
         AES.

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

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

         AES Funding is dependent upon the residual cash flows from the
         Partnership received in the form of distributions to service its debt.
         The loan is payable on May 14, 2002, and bears interest at a variable
         rate based on the terms of the loan agreement, which was 9.25% as of
         December 31, 2000. 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 direct financing capital leases (see Note 3). Lease
         payments, including the amounts that are deferrable under the terms of
         the leases, and the present value of the lease obligations are as
         follows (in thousands):

                                                                      Lease
     Fiscal Years ending December 31,                                Payments

          2001                                                   $    58,423
          2002                                                        62,577
          2003                                                        57,550
          2004                                                        63,450
          2005                                                        59,450
          Thereafter                                               1,376,218
                                                                 ------------

     Total Lease payments                                          1,677,668

     Less imputed interest                                        (1,030,306)
                                                                 ------------

     Present value of Lease payments                             $   647,362
                                                                 ============



                                      F-12
<PAGE>


         Through July 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,
         2000, the Partnership had not deferred any portion of the lease
         obligations.

         The lease obligations are payable to the Owner Trusts. These
         obligations bear imputed interest at 8.993% and 8.819% for the Somerset
         and Cayuga facilities, respectively. Total assets under the leases of
         these two Plants were $650 million at December 31, 2000. These amounts
         are included in electric generation assets. The related accumulated
         depreciation, combined for both leased facilities, as of December 31,
         2000 and 1999, was approximately $31.5 million and 11.1 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, 2000, 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.

7.       COMMITMENTS AND CONTINGENCIES

         Coal Purchases - In connection with the acquisition of the Plants, the
         Partnership assumed from NYSEG an agreement to purchase the coal
         required by the Somerset, Cayuga, and Westover Plants. Each year,
         either party can request renegotiation of the price of one-third of the
         coal supplied pursuant to this agreement. During 2000, the coal
         suppliers were committed to sell and the Partnership was committed to
         purchase all three lots of coal and either party could request
         renegotiation of one lot of coal for the following year. The
         Partnership requested renegotiation during 2000 and reached agreement
         on all three lots for 2001. Either party may request renegotiation
         during 2001 but if the parties fail to reach agreement, then the
         parties would have commitments with respect to only two lots in 2002.
         If the same thing happened in 2002, the parties would have commitments
         with respect to only one lot in 2003. 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 is not
         extended, the Partnership would seek a new coal supplier. As of the
         acquisition date, 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. As of December 31, 2000, the remaining liability was
         approximately $7.3 million. The Partnership has minimum coal purchase
         requirements for the years ended 2001, 2002, and 2003 in the amounts of
         $58.3 million, $60.3 million, and $49.0 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




                                      F-13
<PAGE>


         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 transmit over these lines but was required to pay
         the monthly fees until the effective cancellation date, November 19,
         1999. These fees were approximately $3.4 million over the six months
         ended December 31, 1999, and were recorded as a purchase accounting
         liability. Because the Partnership did not use the lines during this
         period, the Partnership received no economic benefit subsequent to the
         acquisition.

         The Partnership was informed by NIMO that the Partnership would be
         responsible for the monthly fees of $500,640 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 approved by the Federal Energy
         Regulatory Commission (FERC) on May 10, 2000. According to the
         settlement, the Partnership will continue to pay NIMO a fixed rate of
         $500,640 per month during the period of November 20, 1999, to October
         1, 2004 and in turn, will receive a form of transmission service
         commencing on May 1, 2000, which the Partnership believes will provide
         an economic benefit over the period of May 1, 2000 to October 1, 2004.
         The Partnership shall have the right under a Remote Load Wheeling
         Agreement (RLWA) to transmit 298 MW over firm transmission lines from
         the Somerset Plant. The Partnership shall have the right to designate
         alternate points of delivery on NIMO's transmission system provided
         that the Partnership shall not be entitled to receive any transmission
         service charge credit on the NIMO system. This final settlement became
         effective November 1, 2000.

         On November 1, 2000, the effective date of the final settlement, the
         transmission contract was classified as an energy-trading contract as
         defined in Emerging Issues Task Force No. 98-10, Accounting for
         Contracts Involved in Energy Trading and Risk Management Activities.
         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
         speculative position since it is not an effective hedge, as defined
         under SFAS No. 133, for the plant and because the Partnership believes
         that the value of the rights received under the agreement exceed the
         payments that are required by the agreement. The agreement is a
         financially settled contract since there is no requirement to flow
         power under this agreement. The agreement generates profits on or from
         exposure to shifts or changes in market prices. The Partnership
         recorded a net asset and a gain of approximately $24.9 million in the
         fourth quarter of 2000 related to this contract.

         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 sought 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. The
         Partnership has provided materials responding to the request from the
         Attorney General and the DEC. This information was 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. 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)




                                      F-14
<PAGE>


         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. 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. All
         of the Plants are currently subject to SO2 allowance requirements, and
         are required to hold sufficient allowances to emit SO2. Both NOX and
         SO2 allowances may be bought, sold, or traded. If NOX and/or SO2
         emissions exceed the allowance amounts allocated to the Plants, then
         the Partnership may need to purchase additional allowances on the open
         market or otherwise reduce its production of electricity to stay within
         the allocated amounts. The Plants were net sellers of NOX allowances in
         2000 and are also expected to have a surplus of NOX allowances in 2001.
         The Plants were self sufficient with respect to SO2 allowances in 2000,
         however it is expected that the Plants may have a shortfall of
         approximately 10,000 to 13,000 SO2 allowances in 2001 assuming the
         units are operated at capacities similar to 2000. At current market
         prices, it may cost upwards of $1.75 million to $2.275 million to
         purchase sufficient SO2 allowances for 2001.

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, 2000
         and 1999, $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




                                      F-15
<PAGE>


         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 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 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 Base Rate loans and
         LIBOR plus 1.625% 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 1.125% for Base Rate loans and LIBOR plus
         1.875% for LIBOR loans. From August 14, 2012 to May 6, 2014, the
         interest rate on the loans under this credit facility is equal to a
         Base Rate plus 1.375% for Base Rate loans and LIBOR plus 2.125% for
         LIBOR loans. The principal amount of SRC's outstanding indebtedness
         under this credit facility is approximately $25 million as of December
         31, 2000.

         The Partnership has 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,
         installed 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.

         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, swap and physical values with
         counter-parties and provide daily financial reporting, end of day
         budget variance, forward mark to market and commercially accepted risk
         analysis.

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

9.       BENEFIT PLANS

         Effective May 14, 1999, the Partnership adopted The Retirement Plan for
         Employees of AES NY, L.L.C. (the Plan), a defined benefit pension plan.
         The Plan covers people employed both under collectively bargained and
         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 New York State
         Electric & Gas. Effective May 29, 1999, the ability to commence
         participation in the Plan and the accrual of benefits under the Plan
         ceased with respect to non-collectively bargained people and the
         accrued benefits of any such participant was fixed as of such date. As
         of December 31, 2000, 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 contributions 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, 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.




                                      F-16
<PAGE>


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

          Discount rate                                                   6.25%

          Rate of compensation increase                                   4.75%

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


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

                                                          2000            1999
                                                          ----            ----
<S>                                                    <C>            <C>
     Service cost                                       $   851         $   498

     Interest cost on projected benefit obligation        1,487             879

     Expected return on plan assets                         (56)            -

     Curtailment gain                                    (5,271)            -
                                                        --------        --------

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

     Change in projected benefit obligation (in thousands):

     Projected benefit obligation, beginning of periods $ 23,880       $ 22,503

     Service cost                                            851            498

     Interest cost                                         1,487            879

     Actuarial Loss                                          409            -

     Benefits Paid                                          (167)           -

     Curtailment                                          (5,659)           -
                                                       ---------        --------

     Projected benefit obligation, end of periods       $ 20,801        $ 23,880


     Change in plan assets(in thousands):

     Fair value of plan assets at beginning of year     $    -          $    -

     Actual return on plan assets                            77              -

     Employer contributions                               2,110              -

     Benefits paid                                         (167)             -
                                                       ---------         ----------
     Fair value of plan assets at end of year              2,020             -
                                                       ---------         ----------
     Funded status/accrued benefit liability           $ (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 $11.2 million and $15.5 million as of
         December 31, 1999 and 2000, respectively.




                                      F-17
<PAGE>


         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, 2000, the Plan had 171 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.      FAIR VALUE OF FINANCIAL INSTRUMENTS

         The fair value of the Partnership's current and non-current financial
         assets and current liabilities approximate their carrying values. The
         fair value estimates are based on pertinent information available as of
         December 31, 2000. The Partnership is not aware of any factors that
         would significantly affect the estimated fair value amounts since that
         date.

11.      SEGMENT INFORMATION

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

12.      RESTRICTIONS ON DISTRIBUTIONS TO PARTNERS

         The Partnership's ability to make distributions to its partners is
         restricted by the terms of the agreements governing the leases of the
         Somerset and Cayuga Plants. The Partnership may make a distribution to
         its partners only on or within 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. A distribution was made on July 11, 2000 in the amount
         of $35 million and a second distribution was made on January 12, 2001
         in the amount of $32.5 million (see Note 6).




                                      F-18
<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, 2000 and 1999. 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, 2000 and 1999, in conformity with accounting principles generally
accepted in the United States of America.


/s/Deloitte & Touche LLP

McLean, Virginia
March 16, 2001




                                      F-19
<PAGE>

<TABLE>
<CAPTION>

                                 AES NY, L.L.C.

                           CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
---------------------------------------------------------------------------------------------
December 31,                                                    2000                  1999
                                                                ----                  ----
                                     ASSETS
                                     ------
<S>                                                    <C>                 <C>
CURRENT ASSETS:
     Restricted cash:
        Operating - cash and cash equivalents            $     12,207         $      6,274
        Revenue account                                        73,141               48,437
     Accounts receivable - trade                               34,976               25,072
     Accounts receivable - affiliates                           2,651                 -
     Accounts receivable - other                                2,430                  368
     Inventory                                                 25,151               30,524
     Prepaid expenses                                           6,244                6,327
                                                         -------------        -------------
          Total current assets                                156,800              117,002
                                                         -------------        -------------
PROPERTY, PLANT, EQUIPMENT, AND RELATED ASSETS:
     Land                                                       7,327                7,300
     Electric generation assets (net of accumulated
        depreciation of $39,390 and $13,950)                  743,029              753,968
     Other intangible assets (net of accumulated
        amortization of $12,273 and $4,646)                   232,480              236,405
                                                         -------------        -------------
          Total property, plant, equipment
            and related assets                                982,836              997,673
                                                         -------------        -------------
OTHER ASSET
     Transmission contract                                     24,851                 -
     Rent reserve account                                      30,978               29,543
                                                         -------------        -------------
TOTAL ASSETS                                             $  1,195,465         $  1,144,218
                                                         =============        =============
</TABLE>
<TABLE>
<CAPTION>

                         LIABILITIES AND MEMBER'S EQUITY
                         -------------------------------
<S>                                                    <C>                 <C>
CURRENT LIABILITIES:
     Accounts payable                                    $      1,457        $        552
     Lease financing - current                                  1,813                  -
     Environmental remediation                                  2,000                  -
     Accrued interest expense                                  29,472              38,460
     Due to The AES Corporation                                 8,746               3,250
     Due to other affiliates                                     -                    257
     Other accrued expenses                                    18,912              13,860
     Other liabilities                                          5,020               7,837
                                                         -------------       -------------
          Total current liabilities                            67,420              64,216
                                                         -------------       -------------
LONG-TERM LIABILITIES:
     Lease financing - long-term                              645,549             650,000
     Environmental remediation                                 12,801              13,641
     Defined benefit plan obligation                           18,592              28,046
     Other liabilities                                          3,267               6,603
                                                         -------------       -------------
          Total long-term liabilities                         680,209             698,290
                                                         -------------       -------------
TOTAL LIABILITIES                                             747,629             762,506

COMMITMENTS AND CONTINGENCIES (Note 6)
MINORITY INTEREST                                             443,358             377,895
MEMBER'S EQUITY                                                 4,478               3,817
                                                         -------------       -------------
TOTAL LIABILITIES AND MEMBER'S EQUITY                    $  1,195,465        $  1,144,218
                                                         =============       =============
</TABLE>


                                      F-20
<PAGE>


                                 AES NY, L.L.C.

                      NOTES TO CONSOLIDATED BALANCE SHEETS

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


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

         AEE, a Delaware limited Company, was formed on December 2, 1998. AEE's
         wholly owned subsidiaries are AES Somerset, L.L.C., AES Cayuga, L.L.C.,
         and AEE2, L.L.C., (which wholly owns AES Westover, L.L.C. and AES
         Greenidge, L.L.C.). AEE began operations on May 14, 1999. Prior to that
         date, AEE had no operations. AEE was established for the purpose of
         owning and operating four coal-fired electric generating stations (the
         AEE Plants) with a total combined capacity of 1,268 MW. Two of the
         plants are owned by AEE and two of the plants are leased by AEE (see
         Note 5), and are operated by AEE's wholly owned subsidiaries in the
         State of 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 liability company, was formed on December 3,
         1998. ACR's wholly owned subsidiaries are AES Jennison, L.L.C. and AES
         Hickling, L.L.C., which each owns a coal-fired electric generating
         station (the ACR Plants) with a combined capacity of 156 MW. ACR began
         operations on May 14, 1999. Prior to that date ACR had no operations.
         The limited partner of ACR is AES NY 2, L.L.C. The AEE Plants and the
         ACR Plants are hereinafter referred to collectively as "the Plants."

         At the time the Company acquired its electricity generating stations,
         the Company entered into a two-year agreement for energy marketing
         services with Merchant Energy Group of the Americas, Inc. ("MEGA"), an
         Annapolis, Maryland-based subsidiary of Gener S.A., a Chilean
         independent power producer listed on the New York Stock Exchange. MEGA
         was responsible for marketing the Company's electric energy, installed
         capacity and ancillary services in the deregulated New York power
         market. The marketing agreement between the Company and MEGA was
         terminated effective November 26, 2000. AEE has paid MEGA $1.6 million
         and will make an additional four payments of $225,000 each from 2002 to
         2005 as part of the termination of the agreement with MEGA.

         AEE 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 7).

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

         During the fourth quarter of 2000, ACR placed its Hickling and Jennison
         plants on long-term cold standby. The long-term cold standby
         designation means that these plants




                                      F-21
<PAGE>


         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 capacity purchase agreement with
         NYSEG, which terminates on April 30, 2001.

2.       SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation - The consolidated balance sheets include
         the accounts of the Company, AEE and ACR and their subsidiaries. The
         financial statements are presented on a consolidated basis because the
         Company, as general partner, controls the operations of AEE and ACR
         (Note 1). All material inter-company 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, 2000
         and 1999(using the equity method of accounting) consist only of the 1%
         ownership interest in AEE ($4,414,000 and $3,782,000, respectively) and
         the 1% ownership interest in ACR ($64,000 and $35,000). The Company had
         no liabilities as of December 31, 2000, other than liabilities of AEE
         and ACR for which it is responsible as General Partner of AEE and ACR.

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

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

         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, spare parts, materials, and supplies.

         Inventory, as of December 31, 2000 and 1999, consisted of the following
(in thousands):

                                                      2000              1999
                                                      ----              ----

        Coal and other raw materials                $ 7,487           $ 12,756
        Spare parts, materials, and supplies         17,664             17,768
                                                    --------          --------

        Total                                       $25,151           $ 30,524
                                                    ========          =========


         Property, Plant, Equipment, and Related Assets - Electric generation
         assets that existed at the date of acquisition (see Note 3) are
         recorded at fair market value. The AEE Somerset (formerly known as
         Kintigh) and AEE Cayuga (formerly known as Milliken) Plants, which
         represent $650 million of the electric generation assets, are accounted
         for as direct financing capital leases (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.




                                      F-22
<PAGE>


         The Company is currently evaluating the future of the AES Jennison and
         AES 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 its Hickling and Jennison 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 capacity purchase
         agreement with NYSEG, which terminates on April 30, 2001.

         Electric generation assets as of December 31, 2000 and 1999, consisted
of the following (in thousands):

                                                              2000
                                                              ----
                                                     AEE       ACR      Total

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


                                                              1999
                                                              ----
                                                     AEE       ACR      Total

   Electric generation tangible assets          $ 762,890   $ 5,028   $767,918
   Other intangible assets                        241,051       -     $241,051
   Accumulated depreciation                       (17,389)   (1,207)  $(18,596)
                                                ---------   -------   ---------
   Total                                        $ 986,552   $ 3,821   $990,373
                                                =========   =======   =========


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

         Rent Reserve Account - As part of AEE's lease obligation (see Note 5),
         AEE is required to maintain a rent reserve account equal to the maximum
         semiannual payment with respect to the sum of basic rent (other than
         deferrable payments) and fixed charges expected to become due on any
         one basic rent payment date in the immediately succeeding three-year
         period. As of December 31, 1999 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 for the year ended
         December 31, 2000 and for the period from May 14,




                                      F-23
<PAGE>


         1999 through December 31, 1999, were approximately $1.4 million and
         $870,000, respectively, and are included in the rent reserve account
         balance. At December 31, 1999 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.

         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.

         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 on as of
         March 9, 2001. Amounts outstanding under the working capital credit
         facility were required to be reduced to zero for thirty days prior to
         any one lease rental payment date in each year. Interest accrued on
         outstanding balances at a base rate plus 1% or the applicable adjusted
         Eurodollar rate plus 1.75%. The working capital credit facility was
         collateralized by a pledge of AEE's membership interest in AEE2, L.L.C.
         and by a security interest in equipment and personal property of AEE2,
         L.L.C. During 1999 and 2000, AEE made two borrowing under this working
         capital 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. As of December 31, 2000, no amounts were
         outstanding under this credit facility. AEE is currently finalizing the
         terms and conditions of a $35 million secured revolving working capital
         and letter of credit facility with Union Bank of California, N.A.

         Revenue Recognition - Revenues from the sale of electricity are
         recorded based upon output delivered and rates specified under contract
         terms. Revenue 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.

         New York Transition Agreement - As the New York ISO system represents a
         deregulated environment, the ISO will attempt to ensure stability of
         the power grid in New York by requiring each entity engaged in retail
         sales of electricity to obtain installed capacity commitments from
         generators in an amount equal to the entity's forecasted peak load plus
         a reserve margin. This requirement is intended to ensure that an
         adequate supply of electricity is always available. The Company entered
         into a two-year transition agreement with New York State Electric & Gas
         Corporation (NYSEG) pursuant to which AEE and ACR sell their installed
         capacity to NYSEG in order to permit NYSEG to comply with ISO standards
         for system stability. The transition agreement was assumed by AEE and
         ACR on the date of acquisition of the AEE and the ACR Plants. The
         Company recognizes revenue under this contract as it is earned, which
         is $68 per MW per day for installed capacity made available. This
         agreement expires 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 the member or partners. Differences between the results
         of operations reported in the financial statements and those reported
         on individual partners' or member's income tax returns are due
         primarily to the use of different lease treatment and accelerated
         depreciation methods, and shorter useful lives for income tax purposes.

         Use of Estimates - The preparation of financial statements in
         conformity with generally accepted accounting principles requires the
         Company to make estimates and assumptions that affect reported amounts
         of assets and liabilities and disclosures of contingent assets and
         liabilities at the date of the financial statements, as well as


                                      F-24
<PAGE>


         the reported amounts of revenues and expenses during the reporting
         period. Actual results could differ from those estimates.

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

         Comprehensive Income - In 1999 the Company adopted Statement of
         Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
         Income, which establishes rules for the reporting of comprehensive
         income and its components. The adoption of SFAS No. 130 had no impact
         on the Company's financial statements as of December 31, 1999 and 2000
         as it had no items of other comprehensive income.

         New Accounting Pronouncements - On January 1, 2001, AEE 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 No. 133
         requires that an entity recognize all derivatives (including
         derivatives embedded in other contracts) as either assets or
         liabilities on the balance sheet and measure those instruments at fair
         value. Changes in the derivative's fair value are to be recognized
         currently in earnings, unless specific hedge accounting criteria are
         met. Hedge accounting allows a derivative's gains and losses in fair
         value to offset related results of the hedged item in the statement of
         operations and requires that a company formally document, designate and
         assess the effectiveness of transactions that receive hedge accounting.

         SFAS No. 133 allows hedge accounting for fair value and cash flow
         hedges. SFAS No. 133 provides that the gain or loss on a derivative
         instrument designated and qualifying as a fair value hedge, as well as
         the offsetting gain or loss on the hedged item attributable to the
         hedged risk, be recognized currently in earnings in the same accounting
         period. SFAS No. 133 provides that the effective portion of the gain or
         loss on a derivative instrument designated and qualifying as a cash
         flow hedge be reported as a component of other comprehensive income in
         stockholders' equity and be reclassified into earnings in the same
         period or periods during which the hedged transaction affects earnings.
         The remaining gain or loss on the derivative, if any, must be
         recognized currently in earnings.

         AEE utilizes electric derivative financial instruments, including
         swaps, options, and forwards, to manage risk related to electricity
         sales.

         Certain of AEE's derivative instruments qualify as cash flow hedges, as
         defined by SFAS No. 133. As required by SFAS No. 133 for these
         instruments, AEE has documented the effectiveness of the hedges by
         performing tests to demonstrate the high correlation between the
         derivative instruments and the underlying hedged transactions or
         commitments. These effectiveness tests will be updated quarterly.
         Although many of AEE's derivative instruments qualify as cash flow
         hedges, adoption of SFAS No. 133 will increase volatility in reported
         earnings.

         Adoption of SFAS No. 133 will result in the recognition of
         approximately $66.5 million of derivative liabilities on AEE's balance
         sheet as of January 1, 2001. Additionally, adoption of SFAS No. 133
         will result in a reduction of other comprehensive income of
         approximately $66.5 million, which will be included in the first
         quarter 2001 balance sheet as a cumulative effect of a change in
         accounting principle. Approximately $26 million of other comprehensive
         income related to derivative instruments as of January 1, 2001 is
         expected to be recognized as expense in earnings over the next twelve
         months.

         The Company adopted Staff Accounting Bulletin No. 101, Revenue
         Recognition in Financial Statements, during the first quarter of 2000.
         The adoption of this standard did not have a significant impact on its
         financial condition or results of operations.

         Reclassifications - Certain reclassifications have been made to the
         1999 financial statements to conform with the 2000 presentation.

3.    ACQUISITION

         On May 14, 1999, the AEE Plants were acquired from NYSEG for
         approximately $914 million. The Partnership's wholly owned subsidiary,
         AEE2, L.L.C., acquired ownership


                                      F-25
<PAGE>


         of two of the Plants, Westover (formerly known as Goudy) and Greenidge.
         The other two Plants, Somerset and Cayuga, were acquired for $650
         million by twelve unrelated third-party owner trusts (collectively, the
         Owner Trusts) organized by three unrelated institutional investors.
         Simultaneously, AEE entered into separate leasing agreements for the
         Somerset and Cayuga Plants with the Owner Trusts. The Company accounts
         for these leases as direct financing capital 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 remediation for soil and ground water
         contamination. AEE engaged another environmental consulting firm to
         evaluate the costs estimated by NYSEG's consultants. The environmental
         analysis and AEE's estimate of other environmental remediation costs
         indicated that there existed a range of potential remediation costs of
         between $8.5 million and $19.7 million, with a most probable liability
         of approximately $12 million. AEE recorded $12 million as an
         undiscounted liability under purchase accounting for the projected
         remediation cost at the acquisition date. As of December 31, 1999, $2
         million was classified as a current liability.

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

         AEE and ACR receive certain payments for installed capacity under the
         New York Transition Agreement (see Note 2). Payments received in 1999
         while the Somerset Plant was out of service, of approximately $2.1
         million, have reduced the total amount of capitalized costs. Total
         capitalized costs 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.

         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 its Hickling and Jennison
         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
         capacity purchase agreement with NYSEG, which terminates on April 30,
         2001.


                                      F-26
<PAGE>


4.       CAPITALIZATION

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

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

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

         AES Funding is dependent upon the residual cash flows from AEE and ACR
         received in the form of distributions to service its debt. The loan is
         payable on May 14, 2002, and bears interest at a variable rate based on
         the terms of the loan agreement, which was 9.5625% as of December 31,
         2000. AEE and ACR have no obligation to repay this loan. If AES Funding
         were unable to repay this loan, one of the remedies available to the
         lenders would be to seek to sell the membership interests in AES NY
         Holdings, L.L.C., which would divest AES of control of the Company,
         AEE, and ACR.

5.       LEASE FINANCING

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

                                                                       Lease
      Fiscal Years Ending December 31,                                Payments

      2001                                                         $   58,423
      2002                                                             62,577
      2003                                                             57,550
      2004                                                             63,450
      2005                                                             59,450
      Thereafter                                                    1,376,218
                                                                   -----------

      Total Lease payments                                          1,677,668

      Less imputed interest                                        (1,030,306)
                                                                   -----------

      Present value of Lease payments                              $  647,362
                                                                   ===========

         Through July 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,
         2000, AEE had not deferred any portion of the lease obligation.

         The lease obligations are payable to the Owner Trusts. These
         obligations bear imputed interest at 8.993% and 8.819% for the Somerset
         and Cayuga facilities, respectively. Total assets under the leases of
         these two Plants were $650 million at December 31, 1999. These amounts
         are included in electric generation assets. The related accumulated
         depreciation, combined for both leased facilities, as of December 31,
         2000 and 1999, was approximately $31.5 million and $11.1 million,
         respectively.


                                      F-27
<PAGE>


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

         AEE's ability to make distributions to its partners is restricted by
         the terms of the agreements governing the leases of the AEE Somerset
         and Cayuga Plants. The ability of AEE to make distributions to its
         partners is restricted unless certain covenants, including the
         maintenance of certain coverage ratios, are met. In addition, AEE may
         make a distribution to its partners only on or within 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. A distribution was made on July 11,
         2000 in the amount of $35 million and a second distribution was made on
         January 12, 2001 in the amount of $32.5 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, 2000, AEE had fulfilled its
         obligation to fund the additional liquidity account by establishing a
         letter of credit, issued by BankBoston, dated May 14, 1999, in the
         stated amount of approximately $36 million (the Additional Liquidity
         Letter of Credit). This letter of credit was established by AES for the
         benefit of AEE. However, AEE is obligated to replenish or replace this
         letter of credit in the event it is drawn upon or needs to be replaced.

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

6.       COMMITMENTS AND CONTINGENCIES

         Coal Purchases - In connection with the acquisition of the AEE Plants,
         AEE assumed from NYSEG an agreement to purchase the coal required by
         the AEE Somerset, Cayuga, and Westover plants. Each year, either party
         can request re-negotiation of the price of one-third of the coal
         supplied pursuant to this agreement. During 2000, the coal suppliers
         were committed to sell and AEE was committed to purchase all three lots
         of coal and either party could request re-negotiation of one lot of
         coal for the following year. AEE requested re-negotiation during 2000
         and reached agreement on all three lots for 2001. Either party may
         request re-negotiation during 2001 but if the parties fail to reach
         agreement, then the parties would have commitments with respect to only
         two lots in 2002. If the same thing happened in 2002, the parties would
         have commitments with respect to only one lot in 2003. 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 is not
         extended, AEE would seek a new coal supplier. As of the acquisition
         date, 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. As of December
         31, 2000, the remaining liability was approximately $7.3 million. AEE
         has minimum coal purchase requirements for the years 2001, 2002, and
         2003 in the amounts $58.3 million, $60.3 million, and $49.0 million,
         respectively. ACR had no minimum coal purchase requirements as of
         December 31, 2000.

         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 transmit over these
         lines but


                                      F-28
<PAGE>


         was required to pay the monthly fees until the effective cancellation
         date, November 19, 1999. These fees were approximately $3.4 million
         over the six months ended December 31, 1999, and were recorded as a
         purchase accounting liability. Because AEE did not use the lines during
         this period, AEE received no economic benefit subsequent to the
         acquisition.

         AEE was informed by NIMO that AEE would be responsible for the monthly
         fees of $500,640 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 approved by the Federal Energy
         Regulatory Commission (FERC) on May 10, 2000. According to the
         settlement, AEE will continue to pay NIMO a fixed rate of $500,640 per
         month during the period of November 20, 1999, to October 1, 2004 and in
         turn, will receive a form of transmission service commencing on May 1,
         2000, which AEE believes will provide an economic benefit over the
         period of May 1, 2000 to October 1, 2004. AEE shall have the right
         under a Remote Load Wheeling Agreement (RLWA) to transmit 298 MW over
         firm transmission lines from the Somerset Plant. AEE shall have the
         right to designate alternate points of delivery on NIMO's transmission
         system provided that AEE shall not be entitled to receive any
         transmission service charge credit on the NIMO system. This final
         settlement became effective November 1, 2000.

         On November 1, 2000, the effective date of the final settlement, the
         transmission contract was classified as an energy-trading contract as
         defined in Emerging Issues Task Force No. 98-10, Accounting for
         Contracts Involved in Energy Trading and Risk Management Activities.
         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
         speculative position since it is not an effective hedge, as defined in
         SFAS No. 133, for the plant and because AEE believes that the value of
         the rights received under the agreement exceed the payments that are
         required by the agreement. The agreement is a financially settled
         contract since there is no requirement to flow power under this
         agreement. The agreement generates profits on or from exposure to
         shifts or changes in market prices. AEE recorded a net asset and a gain
         of approximately $24.9 million in the fourth quarter of 2000 related to
         this contract.

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

         AEE received an information request letter dated October 12, 1999 from
         the New York Attorney General, which sought 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. The
         Company has provided materials responding to the requests from the
         Attorney General and the DEC. This information was 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. 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. 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


                                      F-29
<PAGE>


         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
         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, the
         Company 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
         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 - 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. All of the Plants are currently subject to
         SO2 allowance requirements, and are required to hold sufficient
         allowances to emit SO2. Both NOX and SO2 allowances may be bought,
         sold, or traded. If NOX and/or SO2 emissions exceed the allowance
         amounts allocated to the six Plants, then the Company may need to
         purchase additional allowances on the open market or otherwise reduce
         its production of electricity to stay within the allocated amounts. The
         Plants were net sellers of NOX allowances in 2000 and are also expected
         to have a surplus of NOX allowances in 2001. The Plants were self
         sufficient with respect to SO2 allowances in 2000, however it is
         expected that the Plants may have a shortfall of approximately 10,000
         to 13,000 SO2 allowances in 2001 assuming the units are operated at
         capacities similar to 2000. At current market prices, it may cost
         upwards of $1.75 million to $2.275 million to purchase sufficient SO2
         allowances for 2001.

         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
         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 carried
         out 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 DEC in the spring of 2000, and a Closure Plan which was submitted
         to the Department of Environmental Conservation in January 2001. The
         latest part of the consent order will be implemented during the 2001
         spring/summer construction season when the work scope for covering the
         site and carrying out the future monitoring of the site per the Closure
         Plan will be implemented. AEE2, L.L.C. will contribute two-thirds of
         the costs to close the landfill, which are anticipated to be
         approximately $3 million, as additional costs for long term groundwater
         monitoring. While the actual closure costs may exceed $3 million, which
         is included in the environmental remediation liability (see Note 3),
         management does not expect any added closure costs to be material.

7.       RELATED PARTY TRANSACTIONS

         AEE has entered into a contract with Somerset Railroad Corporation
         (SRC), a wholly owned subsidiary of AES NY 3, L.L.C., which is an
         indirect wholly owned subsidiary of AES, pursuant to which SRC will
         haul coal and limestone to the Somerset Plant and make


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         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. As of December 31, 2000 and
         1999, $4.6 million and $2.4 million, respectively has been recorded by
         the Company 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 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 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 Base Rate loans and LIBOR plus 1.625% 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
         1.125% for Base Rate loans and LIBOR plus 1.875% for LIBOR loans. From
         August 14, 2012 to May 6, 2014, the interest rate on the loans under
         this credit facility is equal to a Base Rate plus 1.375% for Base Rate
         loans and LIBOR plus 2.125% for LIBOR loans. The principal amount of
         SRC's outstanding indebtedness under this credit facility is
         approximately $25 million as of December 31, 2000.

         AEE entered into an arrangement with 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.

         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 the AEE 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, swap and physical values with
         counter-parties and provide daily financial reporting, end of day
         budget variance, forward mark to market and commercially accepted risk
         analysis.

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


8.       BENEFIT PLANS

         Effective May 14, 1999, the Company 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 New York State
         Electric & Gas. Effective May 29, 1999, the ability to commence


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         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, 2000, 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 contributions 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, 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 are as follows:

          Discount rate                                                   6.25%

          Rate of compensation increase                                   4.75%

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


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

                                                           2000          1999
                                                           ----          ----
      Service cost                                      $ 1,255      $    426

      Interest cost on projected benefit obligation       1,759         1,038

      Expected return on plan assets                        (75)           -

      Curtailment gain                                   (7,192)           -
                                                       --------      --------

      Net benefit cost                                 $ (4,253)      $ 1,464
                                                        ========     ========

      Change in projected benefit obligation
      (in thousands):

      Projected benefit obligation, beginning          $ 28,046      $ 26,582
      of periods

      Service cost                                        1,255           426

      Interest cost                                       1,759         1,038

      Actuarial Gain                                       (603)

      Benefits Paid                                        (180)

      Curtailment                                        (7,580)
                                                      ----------       -------
     Projected benefit obligation, end of periods     $  22,697      $ 28,046


     Change in plan assets(in thousands):

     Fair value of plan assets at beginning of year   $    -          $    -

     Actual return on plan assets                            77            -

     Employer contributions                               4,208            -

     Benefits paid                                         (180)           -
                                                       ---------      --------
     Fair value of plan assets at end of year             4,105            -


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<PAGE>

                                                      ---------     ----------
     Funded status/accrued benefit liability          $ (18,592)     $ (28,046)
                                                       =========     ==========

         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 $13.2 million and $17.4 million as of
         December 31, 1999 and 2000, respectively.


         During 2000, 137 participants of the plan opted out and 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 Jennison and Hickling went from 55 at December 31,
         1999, to 0 at December 31, 2000. This resulted in a curtailment gain to
         the Plan of approximately $1.9 million. As of December 31, 2000, the
         Plan had 171 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.

9.       FAIR VALUE OF FINANCIAL INSTRUMENTS

         The fair value of the Company's current and non-current financial
         assets and current liabilities approximate their carrying values. The
         fair value estimates are based on pertinent information available as of
         December 31,2000. The Company is not aware of any factors that would
         significantly affect the estimated fair value amounts since that date.

10.      SEGMENT INFORMATION

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

                                   * * * * * *



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