SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~
For the quarterly period ended June 30, 2004
For the quarterly period ended March 31, 2005
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~
For the transition period from to
Commission file number 333-89725

~~AES Eastern Energy, L.P.~~Commission ~~(Exact~~file ~~name~~number ~~of registrant as specified in its charter)~~333-89725

Delaware		54-1920088
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1001 N. 19th Street, Arlington, Va.		22209
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code (703) 522-1315
N/A
Former name, former address and former fiscal year, if changed since last report.

AES Eastern Energy, L.P.

(Exact name of registrant as specified in its charter)

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

4003 Wilson Boulevard, Arlington, Va.		22203
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (703) 522-1315

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes o No ý

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

TABLE OF CONTENTS

		Page
PART I
PART I
Item 1.		Condensed Consolidated Financial Statements (Unaudited)
Item 1. Condensed Consolidated Financial Statements (Unaudited)
AES EASTERN ENERGY, L.P.
AES EASTERN ENERGY, L.P.
Condensed Consolidated Financial Statements:
Condensed Consolidated Financial Statements:
	Consolidated Statements of Income for the three months ended March 31, 2005 and March 31, 2004
Consolidated Statements of Income for the three months ended June 30, 2004 and June 30, 2003		3
	Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
Consolidated Statements of Income for the six months ended June 30, 2004 and June 30, 2003		4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and March 31, 2004
Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003		5
	Statement of Changes in Partners’ Capital for the three months ended March 31, 2005
Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and June 30, 2003		6
	Notes to Condensed Consolidated Financial Statements
Statement of Changes in Partners’ Capital for the six months ended June 30, 2004		7
AES NY, L.L.C. (General Partner of AES Eastern Energy, L.P.)*
Notes to Condensed Consolidated Financial Statements		8
Condensed Consolidated Financial Statements:
AES NY, L.L.C. (General Partner of AES Eastern Energy, L.P.)*
	Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
Condensed Consolidated Financial Statements:
	Notes to Condensed Consolidated Balance Sheets
Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003.		15
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Notes to Condensed Consolidated Balance Sheets		16
		(a) Results of Operations
* The condensed consolidated balance sheets of AES NY, L.L.C. contained in this Quarterly Report on Form 10-Q should be considered only in connection with its status as the general partner of AES Eastern Energy, L.P.
		(b) Liquidity and Capital Resources
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 4.		Controls and Procedures
	(a) Results of Operations	23
PART II
	(b) Liquidity and Capital Resources	26
Item 1.		Legal Proceedings
Item 4. Controls and Procedures		28
Item 6.		Exhibits
PART II
Signatures
Item 1. Legal Proceedings		29
Item 6. Exhibits and Reports on Form 8-K
	(a) Exhibits	29
	(b) Reports on Form 8-K	29
Signatures		29

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

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

AES Eastern Energy, L.P.

Condensed Consolidated Statements of Income

For the three months ended ~~June~~March 3031, ~~2004~~2005 and ~~June~~March 3031, ~~2003~~2004

(Amounts in Thousands)

Three months ended June 30,	2004			2003
Three months ended March 31,	2005			2004
Operating Revenues
Energy	$	9096,~~074~~464		$	92101,~~080~~762
Capacity	63,~~310~~997			74,~~751~~945
Transmission congestion contract	~~(53~~—		)	(2,~~567~~354		)
Other	~~874~~1,623			~~653~~634
Total operating revenues	97102,~~205~~084			97104,~~917~~987
Operating Expenses
Fuel	3841,~~176~~328			3441,~~176~~836
Operations and maintenance	85,~~620~~769			45,~~915~~263
General and administrative	15,~~374~~983			1315,~~812~~173
Depreciation and amortization	9,749			9,027
Depreciation	9,684			9,624
Total operating expenses	71,919			61,930
Gain on asset disposal	(7		)	—
Operating Income	25,286			35,987
Gain on derivative ineffectiveness	(2		)	(29		)
Accretion expense	241			195
Total operating expenses	72,996			72,062
Operating Income	29,088			32,925
Other Income/(Expense)
Interest expense	(14,~~910~~561		)	(14,~~912~~949		)
Interest income	~~509~~551			~~605~~439
Loss on derivative valuation	(22		)	(21		)
Net Income from continuing operations before minority interest	15,078			18,415
Net Income from continuing operations before minority interest	10,863			21,659
Minority interest	91			69
Minority interest	47			—
Net Income	$	15,169		$	18,484
Net Income	$	10,910		$	21,659

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

AES Eastern Energy, L.P. Condensed Consolidated Statements of Income For the six months ended June 30, 2004 and June 30, 2003 (Amounts in Thousands)

Six months ended June 30,	2004			2003
Operating Revenues
Energy	$	190,288		$	194,390
Capacity	11,255			16,397
Transmission congestion contract	(2,407		)	(6,425		)
Other	1,508			1,358
Total operating revenues	200,644			205,720
Operating Expenses
Fuel	80,012			70,874
Operations and maintenance	12,335			9,767
General and administrative	30,547			27,910
Depreciation and amortization	19,458			17,999
Total operating expenses	142,352			126,550
Operating Income	58,292			79,170
Other Income/(Expense)
Interest expense	(29,969		)	(29,533		)
Interest income	948			1,082
Gain on derivative valuation	7			188
Net Income from continuing operations before minority interest	29,278			50,907
Minority interest	116			—
Cumulative effect of change in accounting principle	—			(1,656		)
Net Income	$	29,394		$	49,251

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

AES Eastern Energy, L.P.

Condensed Consolidated Balance Sheets ~~June 30, 2004 and December 31, 2003~~

March 31, 2005 and December 31, 2004

(Amounts in Thousands)

	June 30, 2004		Dec. 31, 2003
	March 31,		Dec. 31,
	2005		2004
ASSETS
Current Assets
Restricted cash:
Operating – cash and cash equivalents	$	3,872	$	2,540
Operating - cash and cash equivalents	$	25,303	$	2,364
Revenue account	7718,~~632~~762		8559,~~231~~218
Accounts receivable – trade	35,916		34,883
Accounts receivable - trade	47,063		42,112
Accounts receivable – affiliates	170		203
Accounts receivable - affiliates	590		394
Accounts receivable – other	942		1,264
Accounts receivable - other	717		836
Derivative valuation asset – current	184		8,153
Derivative valuation asset - current	21		1,240
Inventory	3435,~~205~~759		2738,~~700~~317
Prepaid expenses	610,~~464~~950		8,~~019~~306
Total Current Assets	~~159~~139,~~385~~165		~~167~~152,~~993~~787
Property, Plant, Equipment and Related Assets Land	8,298		7,054
Property, Plant, Equipment and Related Assets
Electric generation assets (net of accumulated depreciation of $222,436 and $156,259)	913,052		902,662
Land	8,318		8,298
Total property, plant, equipment and related assets	921,350		909,716
Electric generation assets (net of accumulated depreciation of $251,752 and $242,094)	895,589		904,136
Total property, plant, equipment and related assets	903,907		912,434
Other Assets
Deferred financing – net of accumulated amortization of $625 and $328	523		303
Deferred financing - net of accumulated amortization of $1,047 and $892	1,935		2,089
Derivative valuation asset – non-current	—		7,990
Derivative valuation asset - non-current	166		2,774
NYISO working capital fund	1,469		—
Credit reserves and other long-term assets	1,548		1,494
Rent reserve account	31,~~717~~346		31,717
Total Assets	$	1,~~114~~078,~~444~~067	$	1,~~117~~103,~~719~~295
LIABILITIES
Current Liabilities
Accounts payable	$	~~1,440~~817	$	~~830~~1,649
Long-term debt lease – current	5,237		7,846
Long-term debt lease - current	4,649		4,411
Other long-term debt – current	2,274		347
Other long-term debt - current	2,413		2,459
Accrued interest expense	2713,~~835~~865		2827,~~004~~663
Derivative valuation liability – current	64,314		26,043
Derivative valuation liability - current	121,593		82,125
Transmission congestion contract	378		359
Due to The AES Corporation and affiliates	12,998		12,864
Due to The AES Corporation and affiliates	8,624		8,930
Accrued coal and rail expenses	9,520		7,431
Accrued coal and rail expenses	9,111		6,456
Environmental remediation - current	332		332
Other liabilities and accrued expenses	15,966		9,624
Loss contingency	1,200		1,200
Total Current Liabilities	135,179		88,439
Other liabilities and accrued expenses	19,430		16,697
Total Current Liabilities	186,817		156,831
Long-term liabilities
Long-term debt lease – non- current	628,585		629,815
Long-term debt lease - non- current	623,936		625,404
Other long-term debt – non- current	17,688		744
Other long-term debt - non- current	15,874		16,411
Environmental remediation	54,~~051~~778		54,~~051~~778
Defined benefit plan obligation	1512,~~015~~884		1613,~~558~~304
Derivative valuation liability – non-current	86,675		17,581
Derivative valuation liability - non-current	58,758		38,151
Asset retirement obligation	1011,~~289~~766		911,~~900~~525
Other liabilities	21,~~039~~948		1,~~944~~907
Total Long-term Liabilities	~~765~~729,~~342~~944		~~681~~711,~~593~~480
Total Liabilities	~~900~~916,~~521~~761		~~770~~868,~~032~~311
Commitments and Contingencies (Note 3)
Minority Interest	8,677		—
Minority interest	8,138		8,229
Partners’ capital	~~205~~153,~~246~~168		~~347~~226,~~687~~755
Total Liabilities and Partners’ Capital	$	1,~~114~~078,~~444~~067	$	1,~~117~~103,~~719~~295

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

AES Eastern Energy, L.P.

Condensed Consolidated Statements of Cash Flows

For the ~~six~~ three months ended ~~June~~ 30March 31, ~~2004~~2005 and ~~June~~March 3031, ~~2003~~2004

(Amounts in Thousands)

	Six months ended June 30, 2004			Six months ended June 30, 2003
	Three months			Three months
	ended			ended
	March 31, 2005			March 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	2915,~~394~~169		$	4918,~~251~~484
Adjustments to reconcile net income to Net cash provided by operating activities:
Adjustments to reconcile net income to
Minority Interest	(171		)	—
Net cash provided by operating activities:
Depreciation and amortization	19,459			17,994
Minority Interest	(91		)	(69		)
Cumulative effect of change in accounting principle	—			1656
Depreciation	9,684			9,624
Asset retirement obligation accretion	389			380
Amortization of deferred financing	155			85
Loss on derivative valuation	11			4,625
Gain on sale of asset	7			—
Write off of deferred financing	—			21
Asset retirement obligation accretion	241			195
Net defined benefit plan cost	(1,543		)	(41		)
Gain/loss on derivative valuation	(3		)	888
Net defined benefit plan cost	(419		)	(358		)
Changes in current assets and liabilities:
Accounts receivable	(~~357~~5,028		)	(1,~~518~~309		)
Inventory	(62,~~505~~558		)	(~~3,170~~813		)
Prepaid expenses	1(2,~~692~~644		)	84(2,967		)
Accounts payable	~~627~~(832		)	(~~126~~356		)
Accrued interest expense	(~~169~~13,799		)	~~815~~(14,028		)
Due to The AES Corporation and affiliates	~~(306~~134		)	~~1,262~~(316		)
Accrued expenses and other liabilities	74,~~900~~808			12,~~467~~398
Net cash provided by operating activities	509,~~421~~940			7211,~~700~~458
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for capital additions	(31,~~538~~164		)	(1,~~236~~282		)
Decrease(increase) in restricted cash	6,464			(31,181		)
Decrease in restricted cash	17,517			42,881
NYISO working capital fund	~~(1,469~~—		)	—(487		)
Net cash provided by(used in) investing activities	1,457			(32,417		)
Decrease in rent reserve	371			341
Net cash provided by investing activities	16,724			41,453
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners distribution paid	(4825,~~700~~000		)	(3848,700		)
Principal payments on lease obligations	(41,~~765~~694		)	(14,~~313~~303		)
Proceeds from other debt	1,390			—
Principal payment on other long-term debt	(119		)	—
Partner’s contribution	~~197~~149			6592
Payments for deferred financing	—			(335		)
Net cash (used in) financing activities	(26,664		)	(52,911		)
Net cash used in financing activities	(51,878		)	(40,283		)
CHANGE IN CASH AND CASH EQUIVALENTS	—			—
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	—			—
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	—		$	—
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	27,~~887~~546		$	27,~~960~~887
Supplemental Disclosure of Non-cash Flow Information:
Assets of the Somerset Railroad Corporation Consolidated at January 1, 2004	$	~~28,432~~—		$	—28,432
Liabilities of the Somerset Railroad Corporation Consolidated at January 1, 2004	$	~~19,586~~—		$	—19,586
Adoption of SFAS 143	$	—		$	3,396

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

AES Eastern Energy, L.P.

Consolidated Statement of Changes in Partners’ Capital

For the ~~six~~ three months ended ~~June~~ 30March 31, ~~2004~~2005

(Amounts in Thousands)

	General Partner			Limited Partner			Total			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income
										Accumulated
Balance, December 31, 2003	$	3,477		$	344,210		$	347,687		$	(27,619	)
										Other
Net income	299			29,095			29,394						29,394
	General			Limited						Comprehensive			Comprehensive
Distributions paid	(487		)	(48,213		)	(48,700		)
	Partner			Partner			Total			Income (Loss)			Income (Loss)
Partner’s contribution (See Note 7)	—			197			197
Balance, December 31, 2004	$	2,269		$	224,486		$	226,755		$	(116,365	)
Other comprehensive (loss)(See Note 4)	(1,233		)	(122,099		)	(123,332		)	(123,332		)	(123,332		)
Net income	152			15,017			15,169						15,169
Comprehensive income (loss)										$	(150,951	)	$	(93,938	)
Distributions paid	(250		)	(24,750		)	(25,000		)
Balance, June 30, 2004	$	2,056		$	203,190		$	205,246
Partners’ contribution (See Note 7)	1			147			148
Other comprehensive (loss) (See Note 4)	(639		)	(63,265		)	(63,904		)	(63,904		)	(63,904		)
Comprehensive (loss)													$	(48,735	)
Balance, March 31, 2005	$	1,533		$	151,635		$	153,168		(180,269		)

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

Notes to the Unaudited Condensed Consolidated Financial Statements

Note 1. Organization

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 is an indirect wholly owned subsidiary of The AES Corporation (AES). The AES Corporation owns indirectly all of the member interests in both AES NY, L.L.C.and AES NY2, L.L.C.

AES NY3, L.L.C., an indirect wholly owned subsidiary of AES, acquired the stock of the Somerset Railroad Corporation (SRC), which owns short line railroad assets used to transport coal and limestone. The Partnership has entered into a contract with SRC pursuant to which SRC will haul coal and limestone to the Partnership’s Somerset coal-fired electric generating stations (Plant) and make its rail ~~cars~~ cars available to transport coal to the Partnership’s Cayuga Plant. The Partnership will ~~pay~~ pay amounts sufficient to enable SRC to pay all of its operating and other expenses, including all out-of-pocket expenses, taxes, interest on and principal of SRC’s outstanding indebtedness, and all capital expenditures necessary to permit SRC to continue to provide rail service to the Somerset and Cayuga Plants. ~~The~~Beginning January 1, 2004, the Partnership ~~has~~consolidated ~~concluded~~SRC ~~that~~in ~~under~~accordance with the ~~revised~~requirements ~~Financial~~under Financial Accounting Standards Board (FASB) interpretation No. 46(R)”Consolidation of of Variable Interest Entities”~~, the Partnership needs to consolidate SRC into its consolidated financial statements as of January 1, 2004~~. ~~(See Note 6)~~

Note 2. Unaudited Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements of of the Partnership and SRC reflect all adjustments, which are necessary, in the ~~opinion~~ opinion of management, for a fair presentation of the Partnership’s consolidated results for the interim periods. All such adjustments are of a normal recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the Partnership’s consolidated financial statements and notes contained therein, as of December 31, ~~2003~~2004 and the year then ended, which are set forth in the Partnership’s Annual Report on Form 10-K for the year ended December 31, ~~2003~~2004.

Note 3. Commitments and Contingencies

Coal Purchases – InThe ~~connection with the acquisition of the~~ Partnership’s ~~four~~has coal~~–fired~~ ~~electric~~purchase ~~generating stations (the Plants)~~commitments, ~~the~~composed ~~Partnership~~of ~~assumed~~short ~~from~~and ~~New~~medium ~~York~~term ~~State~~contracts ~~Electric~~with &various ~~Gas~~mines, ~~Corporation~~ranging ~~(NYSEG) an~~between ~~agreement~~$86.3 toand $105.5 ~~purchase~~million ~~the~~for ~~coal~~2005, ~~required~~and by$65 ~~the~~and ~~Somerset~~$79.6 ~~and~~million ~~Cayuga Plants~~for 2006. ~~The~~ ~~contract~~As ~~expired~~of ~~on December~~March 31, ~~2003.~~2005, the ~~The~~remaining ~~Partnership~~anticipated ~~can~~coal ~~provide~~purchase nocommitments ~~assurances~~for ~~that~~the ityear ~~will~~ending beDecember ~~able~~31, to2005 ~~enter~~are ~~into~~between ~~other~~$65.1 ~~agreements on terms~~ and ~~conditions~~$79.6 ~~that are as favorable as this agreement~~million.

AsAES ofOdyssey, ~~the~~LLC ~~acquisition~~(Odyssey), ~~date~~a ofwholly ~~the~~owned ~~Plants,~~subsidiary ~~the~~of ~~contract~~AES, ~~prices~~in ~~for the~~concert ~~coal~~with ~~purchases through 2002 were above~~ the ~~market price~~Partnership, ~~and~~is ~~the~~using ~~Partnership recorded~~ a ~~purchase~~strategy ~~accounting~~of ~~liability~~varying-term ~~for~~contracts ~~approximately~~with ~~$15.7 million~~multiple ~~related~~coal tosuppliers ~~the fulfillment of its obligation~~ to ~~purchase~~develop ~~coal~~the ~~under~~flexibility ~~this agreement.~~in ~~The~~the ~~purchase~~supply ~~accounting~~chain ~~liability was amortized as a reduction~~ to ~~coal~~ ~~expense~~best ~~over~~meet the ~~life~~ demands of ~~the~~a ~~underlying~~fleet ~~contract. As~~ of ~~December~~merchant ~~31, 2003, the purchase accounting liability was fully amortized~~plants.

~~The~~Line ~~Partnership~~of ~~has~~Credit ~~expected~~Agreement ~~coal~~– As ~~purchases~~of March 31, ~~composed~~2005, of ~~short~~the ~~and medium~~$75 ~~term~~million ~~contracts~~committed ~~with~~under ~~various~~the ~~mines~~Calyon Credit Facility, ~~ranging~~the ~~between~~Partnership ~~$97.9~~had ~~and~~obtained letters of credit of $~~101~~74.4 6 million, which ~~for~~have ~~2004~~been provided as additional margin to support normal, ~~and~~ongoing ~~$78~~hedging activities ~~and~~with ~~$110~~a ~~million~~number ~~for~~of ~~2005~~counterparties.

As of ~~June~~March 3031, ~~2004~~2005, the ~~remaining~~Partnership ~~anticipated~~had ~~coal~~obtained ~~purchase~~letters of credit of ~~commitments~~$49.5 ~~for~~million ~~the~~under ~~year~~AES’s ~~ending~~Revolving ~~December~~Bank 31Loan, ~~2004~~which ~~are~~have ~~between~~been ~~$47.3~~provided ~~and~~as ~~$50.8~~additional ~~million~~margin to support normal, ongoing hedging activities with a number of counterparties.

On September 4, 2003, the Partnership and AES Odyssey, L.L.C. (Odyssey), a wholly owned subsidiary of AES, amended their contract pursuant to which Odyssey provides energy marketing services to include management of the Partnership’s coal and environmental emission credit inventories. The Partnership also agreed to increase the fees paid to Odyssey by the Partnership to $400,000 per month from $300,000 per month.

Odyssey, in concert with the Partnership, is using a strategy of varying-term contracts with multiple coal suppliers to develop the flexibility in the supply chain to best meet the demands of a fleet of merchant plants.

Transmission Agreements - On August 3, 1998, AES NY, L.L.C., the general partner of the Partnership (the General Partner), entered into an agreement with NYSEG for the purpose of transferring certain rights and obligations from NYSEG to the General Partner under an existing transmission agreement among Niagara Mohawk Power Corporation (NIMO), the New York Power Authority, NYSEG and Rochester Gas & Electric Corporation, and an existing transmission agreement between NYSEG and NIMO. This agreement provides for the assignment of rights to transmit energy from the Somerset Plant and other sources to remote load areas and other delivery points, and was assumed by the Partnership on the date of acquisition of the Plants. In accordance with its plan, as of the acquisition date, the Partnership discontinued using this service. The Partnership did not transmit over these lines but was required to pay the monthly fees until the effective cancellation date, November 19, 1999.

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 has the right under a Remote Load Wheeling Agreement (RLWA) to transmit 298 Megawatts (MW) over firm transmission lines from the Somerset Plant. The Partnership has the right to designate alternate points of delivery on NIMO’s transmission system provided that the Partnership shall not be entitled to receive any transmission service charge credit on the NIMO system.

The transmission congestion 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 Independent System Operator (NYISO) in western New York and the more heavily populated areas in eastern New York. The agreement is a financially settled contract since there is no requirement to flow power under this agreement. The agreement generates gains or losses from exposure to shifts or changes in market prices. The Partnership recorded losses of approximately $2.4 million and approximately $6.4 million in the first six months of 2004 and 2003, respectively, related to this contract. The transmission congestion contract is accounted for as a derivative under Statement of Financial Accounting Standards (SFAS) No. 133.

On June 25, 2003, AES Somerset, L.L.C. (the subsidiary of the Partnership that operates the Somerset plant) filed a complaint against NIMO with the FERC. The complaint involves outstanding station service charges for the period April 2000 to May 2003. AES Somerset has calculated that the outstanding charges owed are $290,000, while NIMO has calculated that the outstanding charges are $3.6 million. In December 2003, FERC reiterated its 2001 ruling that independent power plants can net station service power in the AES Somerset and Nine Mile orders. NIMO is appealing the ruling. As of June 30, 2004, AES Somerset has accrued approximately $1.6 million for these charges.

Line of Credit Agreement – On November 20, 2002, the Partnership signed an agreement with Union Bank of California, N.A. for a one-year extension of its current working capital and letter of credit facility. On April 16, 2003, the Partnership signed an amendment to its November 20, 2002 credit agreement with Union Bank of California, N.A. The amendment includes another one-year extension of the current facility; the maturity date of the working capital and letter of credit facility is now January 2, 2005. The amendment also increases Union Bank of California’s commitment from $15 million to $20 million. On April 25, 2003, the Partnership further amended its November 20, 2002 credit agreement with Union Bank of California, N.A. The amendment includes a commitment from Citibank, N.A. for the remaining $15 million of the facility. There have been three borrowings under this facility. The first borrowing was for $9.7 million on January 10, 2003 at an interest rate of 5.75%. This borrowing was repaid in full on January 28, 2003. The second borrowing was for $9.7 million on July 9, 2003 at an interest rate of 5.5%. This borrowing was repaid in full on July 25, 2003. The third borrowing was for $12.9 million and an additional $1 million on January 9, 2004 and February 20, 2004, respectively, at an interest rate of 5.5%. This borrowing was repaid in two payments, $6.2 million on January 27, 2004 and the remaining balance of $7.7 million was repaid on February 26, 2004. As of June 30, 2004, of the $35 million committed, the Partnership has obtained letters of credit of $16.4 million, which have been provided as additional margin to support normal, ongoing hedging activities with a number of counterparties.

AES on January 6, 2003 and February 25, 2003 authorized the Partnership to provide letters of credit to counterparties on its $350 million senior secured revolving credit facility to the amount of $25 million and $35 million for the years of 2003 and 2004, respectively.

On February 12, 2004, the Partnership signed a two-year agreement, effective January 1, 2004, with AES to obtain up to $35 million and $25 million of letters of credit or cash collateral for 2004 and 2005, respectively. This agreement supercedes the authorization of AES on February 25, 2003. The agreement limits the letters of credit amounts and cash collateral to the stated amounts and set into place a fee structure and repayment terms.

AES on April 28, 2004 authorized the Partnership to provide letters of credit to counterparties on its $450 million senior secured revolving credit facility to the amount of an additional $35 million as margin to support normal, ongoing hedging activities. AES also agreed that the maximum amount of letters of credit that the Partnership could provide, under this authorization, on the AES facility would be $95 million from April 28, 2004 until December 31, 2004 and $60 million from January 1, 2005 until December 30, 2005. As of June 30, 2004, the Partnership has obtained letters of credit in the amount of $77 million, which have been provided as additional margin to support normal, ongoing hedging activities with a number of counterparties.

In December 2003, the NYISO adopted changes to its credit policy. Previously, the working capital fund was collected from the load side of the marketplace. The recent change now collects the fund from both the load and supply sides based on a 50/50% ratio. Actual working capital obligation is based on a participant’s net market activity per the total activity of the market. This obligation is eligible to receive interest and is adjusted each year based on a participant’s net activity from the previous year. Further, if a participant leaves the marketplace, it is reimbursed its working capital contribution. The Partnership’s working capital contribution is estimated to be approximately $1.5 million and was deducted from monies owed to the Partnership in the first six months of the year. As of June 30, 2004, the entire amount has been deducted.

Environmental - The Partnership has recorded a liability for environmental remediation associated with the acquisition of the Plants. On an ongoing basis, the Partnership monitors its compliance with environmental laws. Due to 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 ~~the~~ New York State Department of Environmental Conservation (NYSDEC) seeking similar operating and ~~maintenance~~ maintenance history from the Plants. The Partnership has provided materials responding to the requests from the Attorney General and the NYSDEC. This information was sought in connection with the Attorney General’s and the NYSDEC’s investigations of several electricity generating stations in New York that are suspected of undertaking modifications in the past without undergoing an air permitting review.

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

By letter dated May 25, 2000, the NYSDEC issued a Notice of Violation (NOV) to NYSEG for violations of the Clean Air Act and the New York Environmental Conservation Law at the Greenidge and Westover Plants related to NYSEG’s alleged failure to ~~undergo~~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~~ 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 Partnership is currently in negotiation with both the EPA and NYSDEC. If a settlement is not reached, the EPA and NYSDEC could issue the Partnership a notice or notices of violations or file a complaint in court alleging violations of the Clean Air Act and New York Environmental Conservation Law. If the Attorney General, NYSDEC or the EPA does file an enforcement action against the Somerset, Cayuga, Westover or Greenidge Plants, then penalties may be imposed and further emissions reductions might be necessary at these Plants, which could require the Partnership to make substantial expenditures. The Partnership is unable to estimate the effect of such an enforcement action on its financial condition or results of future operations.7

NYSEG, the Partnership agreed to assume responsibility for environmental liabilities that arose while NYSEG owned the Plants subject to certain exceptions.

On January 11, 2005, three subsidiaries which the Partnership controls and two subsidiaries controlled by AES Creative Resources, L.P., another wholly owned subsidiary of AES (collectively, the “AES Entities”), entered into a consent agreement to settle all outstanding NOVs and civil claims that could have been brought by the State of New York against the AES Entities and NYSEG for the alleged violations of the new source review and new source performance standard provisions of the Clean Air Act and its applicable regulations, similar provisions under the New York Environmental Conservation Law and its applicable regulations, common law, and State Executive Law (Consent Decree). The Consent Decree became effective on March 29, 2005, when it was signed and entered by the United States District Court for the Western District of New York. Under the terms and conditions of the Consent Decree, the State of New York covenants not to sue and releases the participating subsidiaries and NYSEG from alleged violations under the above-mentioned air emission laws and regulations and also covenants not to sue or bring any administrative enforcement actions against the AES Entities for claims under the above-mentioned air emission laws and regulations associated with work required pursuant to the Consent Decree or other changes at the Plants commenced after entry of the Consent Decree, but prior to December 31, 2009 and completed by December 31, 2010. Under the Consent Decree, the AES Entities have agreed to pay a $700,000 civil penalty for the violations assessed to NYSEG and will deposit $1,000,000 in an AES Environmental Mitigation Project Account that will be used to carry out one or more projects pertaining to energy efficiency, renewable energy and/or clean air projects that are approved by the NYSDEC and the Office of the Attorney General. The Consent Decree does not address the Somerset and Cayuga Plants, and it is possible that these two Plants may be subject to a separate enforcement action filed either by the EPA, NYSDEC, or the New York State Attorney General.

The Consent Decree sets forth mandated emission reductions and requires the installation of new emission control technologies on certain units or the repowering of or the ceasing of operations of such units. On Greenidge Unit 4, the AES Entities are obligated to control sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions through a multi-pollutant control clean coal project (MCP Project). This obligation is subject to the partial funding of the MCP Project by the U.S. Department of Energy and the absence of any force majeure event or material adverse change in circumstances that affects the economic viability of the MCP Project. The AES Entities are required to commence initial operation of the MCP Project by September 1, 2006 or a date eighteen months after entry of the Consent Decree, whichever is later. The AES Entities are also obligated to use good faith efforts to meet certain NOx emission rates and achieve a certain SO2 removal efficiency during normal operations on Greenidge Unit 4. If the MCP Project on Greenidge Unit 4 is discontinued, the AES Entities are required by December 31, 2009 either to (i) install control technology that will meet the Consent Decree emission limits, (ii) repower with a non-coal fuel source or (iii) cease operations.

On Westover Unit 8, the AES Entities are obligated under the Consent Decree to take one of the following three actions by December 31, 2009 and to notify the NYSDEC of which action they elect to take by June 1, 2007: (i) control NOx and SO2 using technology similar to the MCP Project on Greenidge Unit 4, (ii) repower with a non-coal fuel source or (iii) cease operations. Beginning in 2005 and lasting through 2009, Westover Unit 8 is subject to a declining SO2 emissions cap that starts with a cap in 2005 and declines each year until 2009. Should the AES Entities elect to install emission control technology on Westover Unit 8 by December 31, 2009, then they are obligated under the Consent Decree to use good faith efforts to meet a certain NOx emissions rate and a certain SO2 removal efficiency.

Under the Consent Decree, Greenidge Unit 3 and Westover Unit 7 are required either to (i) install control technology equivalent to Best Available Control Technology or BACT, (ii) be repowered with a non-coal fuel, or (iii) cease operations, no later than December 31, 2009. During the years 2007, 2008, and 2009, these two units will be subject to an annual operating limit of 1,400 hours with an SO2 emission rate of 3.0 lb/mmBtu. The Consent Decree does allow the AES Entities to use up to a 30% blend of sub-bituminous (reduced sulfur) coal at either the Greenidge or Westover Plants.

The Consent Decree also requires the surrender of federal Acid Rain Program SO2 allowances for Greenidge Units 3 and 4 and Westover Units 7 and 8 starting in the year 2012. The amount of allowances that will be surrendered depends on which compliance option the AES Entities ultimately select for these units.

In the event that the AES Entities fail to comply with one or more terms of the Consent Decree, the AES Entities are obligated to pay stipulated penalties that are set forth in the Consent Decree with the exception of noncompliance due to force majeure events or certain material adverse conditions affecting the economic viability of the MCP Project. Upon achieving compliance with the material requirements of the Consent Decree, then the parties to the settlement may petition the court for termination of the Consent Decree. The Partnership expects that the emission reduction and control technology requirements set forth in the Consent Decree will be incorporated into each Plant’s Title V air operating permit.

The Partnership has projected that its share of the capital costs to install the MCP Project at Greenidge Unit 4 will be approximately $29 million, however, there can be no assurance that this will be the actual cost since the Partnership has not entered into an agreement for engineering, procurement and construction of the MCP Project at Greenidge Unit 4.

At this time, the Partnership has not made decisions regarding the options of either installing pollution control technology, repowering or ceasing operations at the other units subject to the terms of the Consent Decree, and the Partnership is unable to project the potential costs associated with complying with the other provisions of the Consent Decree on its financial condition or the effect on future operations.

The EPA is not a signatory to the Consent Decree, and it is possible that EPA could separately issue the Partnership a NOV for alleged violations of the federal Clean Air Act and federally enforceable New York air regulations associated with suspected past modifications of plant equipment without undergoing an air permitting review. If EPA does file an enforcement action against Greenidge and Westover, then penalties may be asserted and further emission reductions might be necessary which could require the Partnership to make substantial expenditures. The Partnership is unable to estimate the effect of any EPA-issued NOV on our financial condition or results of future operations.

Nitrogen Oxide and Sulfur Dioxide Emission Allowances - The Plants emit nitrogen oxide (NOx) and sulfur dioxide (SO2) as a result of burning coal to produce electricity.

The Plants have been allocated allowances by the NYSDEC 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. New York State and the 20 other states in the Mid-Atlantic and Northeast region ~~are~~and ~~classified as~~ the ~~Ozone~~District ~~Transport~~of ~~Region~~Columbia inare subject to the federal ~~Clean~~NOx ~~Air~~SIP ~~Act~~Call rule, which ~~designates~~imposes ~~the~~NOx ~~Ozone~~ozone ~~Transport~~season ~~Region as~~emission ~~not~~reduction ~~being~~requirements inthrough ~~compliance~~an ~~with~~allowance system. Under the ~~ozone~~NOx ~~National~~SIP ~~Ambient~~Call ~~Air~~rule, ~~Quality~~electric ~~Standard.~~generating ~~The~~facilities ~~states~~are inrequired ~~the~~to ~~Ozone~~hold ~~Transport~~allowances ~~Region~~sufficient ~~have agreed~~ to ~~implement~~cover athe ~~three-phase~~ozone season ~~process~~NOx toemissions ~~reduce~~emitted ~~NOx~~by ~~emissions~~such infacilities. Each of the ~~region~~Partnership’s inPlants ~~order~~is subject to ~~comply~~the ~~with~~NOx ~~the federal~~SIP ~~Clean~~Call ~~Air~~rule, ~~Act~~and the ~~Title~~Partnership Ihas ~~requirements~~been ~~for~~allocated ~~ozone~~2,492 ~~non-compliance~~NOx ~~areas. Implementation~~allowances offor the ~~Phase~~2005 ~~III~~ozone ~~emission~~season. The ~~rules~~NOx SIP Call program commenced on May 131, ~~2003~~ 2004.

The Plants are also subject to SO2 emission allowance requirements ~~imposed~~ imposed by the EPA’s Title IV Acid Rain Program. 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~~ emit SO2.

10Both NOx and SO2 allowances may be bought, sold or traded. If NOx and/or SO2 emissions exceed the allowance amounts allocated to the Partnership 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. It is expected that if the units are operated at forecasted capacities, that the cost of NOx and SO2 allowances will not be materially different than the preceding year.

~~Both~~The ~~NOx~~State ~~and~~of ~~SO2~~New ~~allowances~~York’s ~~may be~~Acid ~~bought,~~Deposition ~~sold~~Reduction orProgram’s ~~traded. If~~ NOx ~~and/or SO2 emissions exceed the allowance~~regulations ~~amounts~~became ~~allocated~~effective toOctober ~~the~~1, ~~Plants~~2004, ~~then~~and the ~~Partnership~~SO2 ~~may~~regulations ~~need~~were tophased ~~purchase additional~~in ~~allowances on the open market or otherwise reduce its production of~~January ~~electricity~~1, to2005, ~~stay~~with ~~within~~full ~~the~~implementation ~~allocated amounts. It is expected that the Partnership may have a shortfall during 2004 of approximately 12,500~~ to ~~14,500 SO2~~be ~~allowances~~completed ~~and~~by ~~approximately~~January 1,~~650~~ to2008. ~~1,850~~The ~~NOx allowances assuming the~~Partnership’s ~~units~~compliance ~~are~~strategy ~~operated~~involves atreduced ~~forecasted~~operations ~~capacities.~~from Atthe ~~June~~Plants’ ~~30,~~non-reheat ~~2004 market prices~~units, ~~the~~reducing ~~cost~~emission ~~could~~rates ~~range~~and/or ~~from~~the ~~$9.1~~selling/buying ~~million~~or totrading ~~$10.4~~of ~~million~~New toYork ~~purchase~~State ~~sufficient~~ SO2 and NOx ~~allowances~~ ~~for 2004~~allowances.

In ~~October~~July ~~1999~~2004, ~~New~~the ~~York~~EPA ~~State Governor~~final ~~Pataki~~rule ~~announced~~for anregulating ~~executive~~existing ~~order~~power ~~mandating~~plants ~~additional emission~~under ~~reductions~~Section ~~from~~316(b) ~~New~~of ~~York~~the ~~State~~Clean ~~power~~Water ~~plants.~~Act ~~The~~was ~~Governor’s~~published ~~initiative~~in ~~requires non-ozone~~the ~~season~~Federal ~~NOx~~Register. ~~emission~~This rule ~~reductions~~became ~~based~~effective on 0September 7, 2004.15 ~~lbs/Mmbtu~~This ~~starting~~rule ~~in 2004,~~imposes ~~and~~new acompliance ~~50%~~requirements, with ~~reduction~~potentially ~~from~~significant ~~the~~costs, ~~power~~on operating plants’ ~~Title~~across IVthe ~~SO2~~nation ~~emissions~~with ~~being~~cooling ~~phased~~water inintake ~~from~~structures. ~~2005~~Cost toitems ~~2008.~~include ~~The~~various ~~program~~environmental ~~will~~and beengineering studies ~~implemented~~and ~~through~~potential ~~a market-based~~capital ~~mechanism~~and maintenance costs. The ~~rules~~Partnership ~~implementing~~has not yet determined the ~~Governor’s~~effects ~~initiative~~of ~~(6 NYCRR~~this ~~Parts~~rule ~~237~~on ~~and~~its ~~238)~~financial ~~were~~condition ~~adopted~~or inresults ~~March~~of ~~2003~~operations.

InOn ~~September~~March ~~2003~~10, ~~NYSDEC determined~~2005, the ~~amount~~EPA ofActing ~~NOx~~Administrator ~~emissions~~signed ~~allowances~~the final Clear Air Interstate Rule that ~~would~~will berequire ~~allocated~~further emission reductions in NOx and SO2 emitted from power plants and other sources that significantly contribute to fine particulate ~~the~~(“PM2.5”) ~~Plants~~and ozone pollution in downwind states. NOx ~~The~~and ~~allocation~~SO2 are precursors of PM2.5, and NOx is a ~~several~~precursor ~~hundred~~of ~~tons~~ozone. ~~less~~The ~~than~~final ~~the~~rule ~~Partnership’s~~directs 28 states, including New York, to issue ~~average~~new ~~historical~~regulations that will require major SO2 and NOx ~~emissions~~reductions ~~for~~by ~~the~~2015. ~~Plants~~States ~~during~~must achieve the ~~control~~required ~~period.~~NOx ~~The~~and SO2 reductions by meeting a state-specific emissions ~~Partnership’s~~budget through one of two compliance ~~plan~~methods: ~~cannot~~(i) berequiring ~~finalized~~electric ~~until~~generating facilities in the ~~anticipated~~state ~~New~~to participate in an EPA-administered cap and trade regime ~~York~~that caps emissions in two phases starting with a first phase starting in 2009 and 2010 for NOx ~~allowance~~and ~~market~~SO2, ~~prices~~respectively and a second phase commencing in 2015, or (ii) meeting the budget levels through measures selected by a particular state that are approved ~~more~~by ~~conclusively~~EPA. ~~determined~~States are encouraged to use a cap and emission trading approach. At this point, the Partnership cannot determine what the costs would be to comply with new federal SO2 and NOx emission reduction requirements.

InOn ~~January~~March ~~2004~~15, ~~NYSDEC~~2005, the EPA Acting Administrator signed the final Clear Air ~~determined~~Mercury Rule that regulates mercury emissions from existing and new coal-fired power plants. The final rule requires the ~~amount~~reduction of ~~SO2~~mercury emissions ~~allowances~~to ~~that~~be ~~would~~achieved through bea ~~allocated~~cap toand emission trading program with the first phase commencing in 2010 and the ~~Plants.~~second ~~The~~phase ~~allocation~~starting isin ~~several~~2018. ~~thousand~~Instead ~~tons~~of ~~less~~participating ~~than~~in the ~~Partnership’s~~national ~~average~~trading ~~historical~~program, ~~SO2~~states ~~emissions~~can ~~for~~alternatively establish their own rules as long as the ~~Plants~~state does not exceed its mercury emissions budget. The ~~Partnership’s~~Clean ~~compliance~~Air Mercury Rule ~~plan~~is ~~cannot~~expected to be ~~finalized~~legally ~~until~~challenged by a coalition of states that includes the State ~~anticipated~~of New York ~~SO2~~after ~~allowance~~the ~~market~~final rule is published in the Federal Register. At ~~prices~~this ~~are~~point, ~~more~~the ~~conclusively~~Partnership ~~determined~~cannot determine what the costs would be to comply with the new federal mercury emission reductions requirements.

On May 26, 2004, the New York Supreme Court struck down the regulations. The Court ruled that the regulations had been adopted improperly after the State missed a deadline for publication of a notice to inform the public of proposed changes in the regulations. On July 1, 2004, NYSDEC appealed the Court’s ruling.9

~~The~~Future ~~Partnership~~initiatives ~~voluntarily~~regarding ~~disclosed to~~ the ~~NYSDEC~~impacts ~~and~~of ~~EPA~~greenhouse ongases ~~November 27~~(e.g., ~~2002~~carbon ~~that~~dioxide, ~~NOx~~“CO2”) ~~exceedances~~emissions ~~appear~~and toglobal ~~have~~warming ~~occurred~~continue onto ~~October~~be 30the ~~and~~subject 31of ~~and~~intense ~~November~~debate. In ~~1-8~~response ~~and~~to 10this ofissue, ~~2002.~~Northeastern ~~The~~U.S. ~~exceedances~~states ~~were~~(including ~~discovered~~New ~~through~~York) anhave ~~audit~~agreed byto ~~plant~~work ~~personnel~~to ofdevelop ~~the Plants’~~a ~~NOx~~regional ~~Reasonably Available Control Technology (RACT) tracking system~~market-based ~~which monitors NOx~~ emissions attrading ~~all~~system ~~four Plants subject~~ to ~~the~~reduce ~~Partnership~~power plants’~~s NOx~~ ~~RACT~~CO2 ~~Plan~~emissions. The ~~Partnership~~goal ~~believes~~is ~~that~~to itreach an ~~has~~agreement ~~taken~~in ~~all~~2005 ~~reasonable,~~on ~~good faith~~a ~~efforts~~cap ~~to assess~~ and ~~correct~~emission-trading ~~the exceedances~~program. ~~Immediately~~Until ~~upon~~such ~~the discovery~~time ofas the ~~exceedances, the Selective Catalytic Reduction System (SCR) at~~ ~~the~~rules ~~Somerset~~are ~~Plant~~developed ~~was activated~~ to ~~reduce~~implement ~~NOx~~such ~~emissions.~~a ~~Emission~~program, ~~data indicates that~~ the ~~system~~Partnership ~~had~~cannot ~~already returned to a compliant operation by the~~determine ~~time~~what ~~the~~its ~~error~~impact ~~was~~would ~~discovered.~~be ~~The~~on ~~EPA has decided to defer to~~ the ~~NYSDEC for review of the self-disclosure letter and technical issues. The~~ Partnership’s ~~is unable~~financial toposition ~~predict any potential actions~~ or ~~fines~~results ~~the~~of ~~NYSDEC may require, if any~~operations.

The Partnership voluntarily disclosed to the NYSDEC in January 2003 that the Cayuga Plant had inadvertently burned synfuel (coal with a latex binder applied), which it is not permitted to burn. The Partnership had entered into an agreement with a supplier to purchase coal. It received approximately one 9,000-ton train per month from April 24, 2001 to December 27, 2002. In January 2003, the Partnership became aware that the product the Cayuga Plant had been receiving was synfuel. The Partnership suspended all shipments from that supplier until a resolution could be reached. The Partnership has reviewed the emission and operation data which showed there was no adverse effect to air quality with respect to applicable permit emissions limits attributable to burning the material. The Partnership is unable to predict any potential actions or fines the NYSDEC may require, if any. In July 2003, the Partnership reached an agreement with the supplier to resume shipment of coal in order to satisfy contractual obligations. As part of this agreement, the supplier has provided a written guarantee stating that all fuel shipments will be coal.

In July 2004, the EPA final rule for regulating existing power plants under Section 316(b) of the Clean Water Act was published in the Federal Register. This rule becomes effective on September 7, 2004. This new rule will impose new compliance requirements, with potentially significant costs, on operating plants across the nation with cooling water intake structures. Cost items include various environmental and engineering studies and potential capital and maintenance costs. The Partnership is evaluating the rule and it has not yet determined the effects, of this rule on its financial condition or results of operations.

In January 2004, the EPA proposed an “interstate air quality rule” (renamed the “Clear Air Interstate Rule”) that would require further emission reductions in NOx and SO2 emitted from power plants and other sources that significantly contribute to fine particulate (“PM2.5”) and ozone pollution in downwind states. NOx and SO2 are precursors of PM2.5, and NOx is a precursor of ozone. The proposed rule directs 29 states, including New York, to issue new regulations that will require major SO2 and NOx reductions by 2010 and further reductions by 2015. States are encouraged to use a cap and emission trading approach. A final rule is expected to be issued in 2005. At this point, the Partnership cannot determine what the costs would be to comply with new federal SO2 and NOx emission reduction requirements.

In January 2004, the EPA proposed the “utility mercury reductions rule” that would regulate mercury emissions from existing and new coal-fired power plants. The EPA proposed two alternative approaches for reducing mercury emissions based on different authority under the Clean Air Act. The EPA’s preferred approach is to implement a cap and emission trading program with the first phase commencing in 2010 and the second phase starting in 2018. If the EPA selects the alternative command and control approach, compliance could be required by December 2007. Pursuant to a settlement agreement with environmental groups, the EPA is required to finalize the utility mercury reductions rule by December 15, 2004.

Northeastern U.S. states (including New York) have agreed to work to develop a regional market-based emissions trading system to reduce power plants’ CO2 emissions. The goal is to reach an agreement by April 2005 on a cap and emission trading program. Until such time as the rules are developed to implement such a program, the Partnership cannot determine what its impact would be on the Partnership’s financial position or results of operations.

In June 2004, the EPA preliminarily designated areas of the country that are in nonattainment with the new PM2.5 and 8-hour ozone standards. None of the Partnership’s plants are located in a designated PM2.5 nonattainment county. Only the Somerset Plant is located in a county designated nonattainment for the new ozone standard. Until such time as the final rules are developed to implement a program, the Partnership cannot determine what their impact would be on the Partnership’s financial position or results of operations.

~~Note~~The 4Partnership voluntarily disclosed to the NYSDEC and EPA on November 27, 2002 that NOx exceedances appear to have occurred on October 30 and 31 and November 1-8 and 10 of 2002. The exceedances were discovered through an audit by plant personnel of the Plant’s NOx RACT tracking system. ~~Price~~The ~~Risk~~Partnership ~~Management~~believes that it has taken all reasonable, good faith efforts to assess and correct the exceedances. Immediately upon the discovery of the exceedances, the selective catalytic reduction (SCR) system at the Somerset Plant was activated to reduce NOx emissions. Recently, the Partnership learned of a NOV issued by the NYSDEC for the NOx RACT exceedances through a review of the November 2004 release of the EPA’s Enforcement and Compliance History (ECHO) database. The Partnership has not yet seen the NOV from the NYSDEC. The Partnership is unable to predict any potential actions or fines the NYSDEC may require, if any.

~~The~~On ~~Partnership~~September ~~accounts~~30, ~~for~~2004, the ~~its~~Partnership ~~derivative~~filed ~~instruments~~a inrequest ~~accordance~~ with ~~SFAS~~the ~~No.~~New ~~133,”Accounting~~York ~~for Derivative~~State ~~Instruments~~Board on Electric Generation Siting and ~~Hedging~~the ~~Activities”. The~~Environment ~~Partnership~~seeking ~~utilizes~~clarification ~~derivative~~and/or ~~financial~~an ~~instruments~~amendment to ~~hedge~~its Certificate ~~commodity~~of ~~price~~Environmental ~~risk.~~Compatibility ~~The~~and ~~Partnership~~Public ~~utilizes~~Need ~~electric~~in ~~derivative~~order ~~instruments,~~to permit it to dispose ~~including~~of ~~swaps~~coal ~~and~~combustion ~~forwards,~~by-products towith ~~hedge~~trace ~~the~~or ~~risk~~non-detectable ~~related~~residual toammonia ~~forecasted~~of ~~electricity~~2 ~~sales~~parts ~~over~~per ~~the~~million ~~next~~or ~~two~~less ~~years.~~in ~~The~~the ~~majority~~Area 2 portion of the ~~Partnership~~Somerset Plant’s ~~electric~~ ~~derivatives~~coal ~~are~~ash landfill. The ~~designated~~Partnership ~~and~~expects ~~qualify~~the asNew York ~~cash~~State ~~flow~~Board ~~hedges.~~on ~~No significant~~Electric ~~amounts~~Generation ofSiting ~~hedge~~and ~~ineffectiveness~~the ~~were~~Environment ~~recognized~~to inissue ~~earnings~~an ~~during~~order ~~the~~addressing ~~six~~this ~~months~~request ~~ended~~in ~~June 30, 2004~~2005.

~~Gains~~Note ~~and losses on derivatives reported in accumulated other comprehensive income are reclassified into earnings when the hedged forecasted sale occurs~~4. Derivative ~~Amounts~~Instruments ~~recorded in other comprehensive income (loss) during the~~and ~~six~~Hedging ~~months ended June 30, 2004, were as follows (in millions):~~Activities

Balance as of January 1, 2004	$		(27.6	)
Reclassified to earnings	(22.5			)
Change in fair value	(100.9			)
Balance, June 31, 2004	$	(151.0		)

As of March 31, 2005, the Partnership has recorded $180.3 million in accumulated other comprehensive loss due to hedging activities. No hedges were derecognized or discontinued during the three months ended March 31, 2005. No significant amounts of hedge ineffectiveness were recognized in earnings during the three months ended March 31, 2005.

InGains ~~addition~~and tolosses ~~the~~on ~~electric~~ derivatives ~~classified~~reported asin ~~cash~~accumulated ~~flow~~other ~~hedge contracts, the Partnership has a~~comprehensive ~~Transmission~~income ~~Congestion~~are ~~Contract~~reclassified ~~that~~into isearnings awhen ~~derivative under~~ the ~~definition~~hedged ~~of SFAS~~forecasted ~~No.~~sale ~~133, but does not qualify for hedge accounting~~occurs. ~~This~~ ~~contract is~~Amounts recorded atin ~~fair~~other ~~value~~comprehensive onincome (loss) during the ~~balance~~three ~~sheet~~months ~~with~~ended ~~changes~~March 31, in2005, ~~the~~were ~~fair~~as ~~value recognized~~follows ~~through~~(in ~~earnings.~~millions):

Balance as of January 1, 2005	$	(116.4	)
Reclassified to earnings	19.9
Change in fair value	(83.8		)
Balance, March 31, 2005	$	(180.3	)

In addition to the electric derivatives classified as cash flow hedge contracts, the Partnership had a Transmission Congestion Contract that was a derivative under the definition of SFAS No. 133, but did not qualify for hedge accounting. This contract, which expired in October 2004 and was not renewed, was recorded at fair value on the balance sheet with changes in the fair value recognized through earnings.

Note 5. Asset Retirement Obligations

InA ~~June~~reconciliation ~~2001,~~of the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143, which became effective January 1, 2003, requires entities to record the fair value of a legal liability for an asset retirement obligation ~~in the period in which it is incurred. The new~~ liability ~~was~~for ~~recorded in~~ the ~~first~~three ~~quarter~~months ofended ~~2003.~~March ~~The Partnership capitalized the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period~~31, ~~and~~2005 ~~the~~was ~~capitalized~~as ~~cost~~follows ~~is depreciated~~(in over the useful life of the related asset. Upon settlement of the liability, the Partnership will settle the obligation for its recorded amount or incur a gain or loss upon settlement. The Partnership adopted SFAS No. 143 effective January 1, 2003.millions):

The Partnership has completed a detailed assessment of the specific applicability and implications of SFAS No. 143. The scope of SFAS No. 143, as it applies to the Partnership, includes primarily active ash landfills and water treatment basins. Upon adoption of SFAS No. 143, the Partnership recorded a liability of $9.2 million and a net asset of approximately $3.3 million, which are included in the electric generation assets, and reversed a $4.2 million environmental remediation liability it had previously recorded. The difference between the amounts previously recorded and the net SFAS No. 143 liability is a loss recorded as the cumulative effect of a change in accounting principle of $1.7 million. Reconciliation of asset retirement obligation liability for the six months ending June 30, 2004 was as follows (in millions):

Balance as of January 1, 2005	$	11.5
Accretion	$	0.2
Balance, March 31, 2005	$	11.7

Balance as of January 1, 2004	$	9.9
Accretion	$	0.4
Balance, June 30, 2004	$	10.3

12Note 6. Long-term Incentive Program

~~Note~~Stock 6Option Plan – Employees of the Partnership participate in the AES Stock Option Plan (the SOP) that provides for grants of stock options to eligible participants. ~~New~~ On January 1, 2003, the Partnership adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, prospectively to all employee awards ~~Pronouncements~~granted, modified or settled after January 1, 2003. Awards under the SOP vest over periods ranging from two to five years. The expense recognized under the prospective method for the three months ended March 31, 2005 and 2004 was approximately and $149,000 and $92,000, respectively.

InNote ~~January 2003, the FASB issued Interpretation No~~7. ~~46,~~Benefit “Consolidation of Variable Interest Entities” which provides guidance on how to identify a variable interest entity (VIE), and when the assets, liabilities, non-controlling interests and results of operations of a VIE need to be included in a company’s consolidated financial statements. This interpretation was revised in December 2003 with the issuance of Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (FIN 46(R)).Plan

InTotal ~~general,~~Pension acost ~~VIE~~for ~~is an entity that lacks sufficient equity or its equity holders lack adequate decision making ability. If either of these characteristics is present,~~ the ~~entity~~three ismonths ~~subject~~ended toMarch ~~a variable interests consolidation model~~31, 2005 and ~~consolidation is based on variable interests~~2004, ~~not on ownership of the entity’s outstanding voting stock. Variable interests are defined as contractual~~respectively, ~~ownership, or other money interests in an entity that~~ ~~change~~includes ~~with fluctuations in~~ the ~~entity’s~~following ~~net~~components: ~~asset value. The primary beneficiary consolidates the VIE; the primary beneficiary is defined as the enterprise that absorbs a majority of expected losses or receives a majority of residual returns~~ (ifIn ~~the losses or returns occur~~thousands)~~, or both.~~

The Partnership adopted FIN 46(R) as of January 1, 2004 and has concluded that under the revised interpretation No. 46(R) that the Partnership needs to consolidate SRC into its consolidated financial statements. The Partnership’s consolidated Balance Sheet as of June 30, 2004 reflects additional assets of approximately $27.3 million and liabilities of approximately $18.7 million as a result of this consolidation.

	Three Months ended March 31, 2005		Three Months ended March 31, 2004

Service cost	171		87
Interest cost	385		361
Expected Return on Plan Assets	(227	)	(159	)
Amortization of net (gain) loss	—		—
Total Pension Cost	329		289

~~The~~Note ~~sales – leaseback transaction under which the Somerset and Cayuga Plants were acquired qualifies as a VIE~~8. ~~The~~New ~~sales~~Accounting ~~– leaseback rules require that the leases be treated as financing leases for purposes of the Partnership’s financial statements, which they have been from the inception of the Partnership.~~Pronouncements

~~Note~~Share-Based Payment 7- In December 2004, the FASB issued a revised SFAS No.123 ~~Long~~(“SFAS No. 123R”), “Share-~~term~~Based ~~Incentive~~Payment”, ~~Program~~which is a revision of SFAS No. 123. SFAS No. 123R eliminates the intrinsic value method under Accounting Principles Board Opinion No. 25 as an alternative method of accounting for stock-based awards by requiring that all share-based payments to employees, including grants of stock options for all outstanding years be recognized in the financial statements based on their fair values. It also revises the fair-value based method of accounting for share-based payment liabilities, forfeitures and modifications of stock-based awards and clarifies SFAS No. 123’s guidance related to measurement of fair value, classifying an award as equity or as a liability and attributing compensation to reporting periods. In addition, SFAS No. 123R amends SFAS No. 95, “Statement of Cash Flows”, to require that excess tax benefits be reported as a financing cash flow rather than as an operating cash flow.

~~Stock~~The ~~Option~~Partnership ~~Plan~~is –required ~~Employees~~to ofadopt SFAS ~~the~~No. ~~Partnership~~123R ~~participate~~for in the ~~AES Stock~~interim ~~Option~~period ~~Plan~~beginning ~~(the~~July ~~SOP)~~1, ~~that~~2005 ~~provides~~using ~~for~~a ~~grants~~modified version of ~~stock~~prospective ~~options to eligible participants~~application. ~~Prior~~The ~~to 2003, the~~ Partnership ~~accounted~~ ~~for~~may ~~the~~apply ~~SOP~~a ~~under~~modified ~~the~~retrospective ~~recognition~~application to ~~and~~periods ~~measurement~~before ~~provisions~~the ofrequired ~~APB Opinion~~effective Nodate. The ~~25,~~Partnership ~~“Accounting~~plans ~~for Stock Issued~~ to ~~Employees,”~~adopt ~~and~~SFAS ~~related Interpretations.~~ No. ~~stock-based employee~~123R ~~compensation~~no ~~cost~~later isthan ~~reflected~~July ~~in 2002 net income~~1, ~~as all options~~2005, ~~granted~~but ~~under~~has ~~those~~not ~~plans~~determined ~~had~~what anmethod ~~exercise~~it ~~price~~will ~~equal to the market value of~~use. ~~the~~The ~~underlying~~Partnership ~~common~~is ~~stock~~currently onevaluating the ~~date~~effect of ~~grant. Effective~~adoption ~~January 1, 2003, the Partnership adopted the fair value recognition provisions~~ of SFAS No. ~~123, “Accounting for Stock-Based~~ ~~Compensation”~~123R, ~~prospectively~~but todoes ~~all~~not ~~employee~~expect ~~awards granted, modified or settled after January 1, 2003. Awards under~~ the ~~SOP~~ ~~vest~~adoption ~~over~~to ~~periods~~have ~~ranging~~a ~~from~~material ~~two~~effect toon ~~five years. Therefore,~~ the ~~cost related to stock-based employee compensation~~Partnership’s ~~included~~financial incondition, ~~the~~results ~~determination~~ of ~~net~~operations ~~income~~or ~~for~~cash ~~2003~~flows, isas ~~less than that which would have been recognized if~~ the ~~fair~~Partnership ~~value based method~~ had ~~been applied to~~ ~~all~~previously ~~awards~~adopted ~~from~~income ~~the~~statement ~~inception~~treatment offor ~~the~~compensation ~~Partnership.~~related ~~The~~to ~~expense~~share-based payments ~~recognized~~ under ~~the~~ ~~prospective~~SFAS ~~method~~No. ~~for the six months ended June 30, 2004 was approximately $197,000~~123.

~~Note~~On 8April 14, 2005, the SEC deferred the effective date of SFAS No. ~~Benefit~~123R until ~~Plan~~the beginning of 2006 for calendar year companies.

Asset Retirement Obligations - In ~~December~~March ~~2003~~2005, the FASB issued ~~SFAS~~FASB Interpretation No. ~~132~~ (~~revised 2003~~FIN), 47 “~~Employers’~~Accounting ~~Disclosure~~for ~~About~~Conditional ~~Pensions~~Asset ~~and Other~~Retirement ~~Postretirement Benefits”~~Obligations, ~~which~~an ~~amends~~interpretation ~~SFAS~~of ~~No.~~FASB ~~87,~~Statement ~~“Employers’ Accounting for Pensions”, SFAS~~ No. 88143”, ~~“Employers’~~which ~~Accounting for Settlements and Curtailments~~clarifies ofthe ~~Defined~~term ~~Benefit~~“conditional ~~Pension~~asset ~~Plans~~retirement ~~and~~obligation” ~~for~~as ~~Termination~~used ~~Benefits”,~~in ~~and~~ SFAS No. ~~106,~~ ~~“Employers’~~143 “Accounting for ~~Postretirement~~Asset ~~Benefits~~Retirement ~~Other than Pensions~~Obligations”,. ~~and~~Specifically, ~~replaces~~FIN ~~SFAS~~47 ~~No.~~provides ~~132,~~that ~~“Employers’~~an ~~Disclosures~~asset ~~About~~retirement ~~Pensions~~obligation ~~and~~is ~~Other~~conditional ~~Postretirement~~when ~~Benefits”~~either ~~(collectively~~the ~~referred~~timing toand ~~as “SFAS No. 132~~ (~~revised~~or)~~”).~~ ~~SFAS~~method ~~No.~~of ~~132~~settling ~~(revised)~~the ~~expands~~obligation ~~employers’~~is ~~disclosures about~~conditioned ~~pension~~on ~~and~~a ~~other~~future ~~post-retirement~~event. ~~benefit~~Accordingly, ~~plans~~an toentity ~~present~~is ~~more~~required ~~information regarding~~to ~~the~~recognize ~~economic~~a ~~resources~~liability ~~and~~for the ~~obligations~~fair value of ~~such~~a ~~plans~~conditional inasset ~~terms~~retirement ofobligation if the ~~plans’~~ ~~assets,~~fair ~~obligations,~~value ~~cash~~of the ~~flows~~liability ~~and~~can ~~net~~be ~~periodic~~reasonably ~~benefit costs~~estimated. ~~Additionally,~~ ~~SFAS~~Uncertainty ~~No.~~about ~~132~~the ~~(revised)~~timing ~~requires~~and ~~interim-period disclosures~~(or) ~~regarding~~method ~~plan~~of ~~benefit~~settlement ~~costs~~of ~~and~~a ~~material~~conditional ~~plan~~asset ~~changes.~~retirement ~~The~~obligation ~~Partnership~~should ~~adopted~~be factored into the ~~new~~measurement ~~annual~~of ~~disclosure~~the ~~requirements~~liability ofwhen ~~SFAS~~sufficient Noinformation exists. ~~132~~This ~~(revised) effective as~~interpretation ofalso ~~December~~clarifies ~~31,~~when ~~2003.~~an ~~The~~entity ~~interim-period~~would ~~disclosure~~have ~~requirements~~sufficient ~~became effective~~information ~~for~~to reasonably estimate the ~~Partnership~~fair asvalue of ~~June~~an ~~30,~~asset ~~2004.~~retirement ~~As SFAS No~~obligation. ~~132~~FIN ~~(revised) does~~47 ~~not~~is ~~change~~effective ~~the~~for ~~measurement or recognition of pension and other~~fiscal ~~post-retirement~~years ~~benefit~~ending ~~plans~~after asDecember ~~required~~15, ~~by SFAS No~~2005. ~~87,~~The ~~SFAS~~Partnership ~~No.~~is 88currently ~~and~~evaluating ~~SFAS~~the ~~No.~~effect ~~106,~~that adoption of ~~this~~FIN ~~new~~47 ~~standard~~will ~~had~~have noon ~~effect~~its onfinancial ~~the~~position ~~Partnership’s consolidated~~and ~~financial~~results ~~statements~~of operations.

~~Effective~~Implicit ~~May~~Variable ~~14,~~Interest ~~1999,~~Entities ~~the~~- ~~Partnership adopted~~In ~~The~~March ~~Retirement~~2005, ~~Plan~~the ~~for~~FASB ~~Employees~~issued ofStaff ~~AES~~Position ~~NY,~~(FSP) LNo.~~L.C.~~ FIN 46(~~the Plan~~R)-5, ~~a defined~~“Implicit ~~benefit~~Variable ~~pension~~Interests ~~plan.~~under FASB ~~The~~Interpretation ~~Plan~~No. ~~covers~~46 ~~people~~(revised ~~employed~~December ~~both~~2003), ~~under collectively~~Consolidation ~~bargained~~of ~~and~~Variable ~~non-collectively~~Interest ~~bargained arrangements~~Entities”. ~~Certain~~ ~~people~~This ~~formerly~~FSP ~~employed~~clarifies bythat ~~NYSEG~~when (applying the ~~Transferred~~variable ~~Persons)~~interest ~~receive~~consolidation ~~credit~~model, ~~under~~a ~~the~~reporting ~~Plan~~enterprise ~~for~~should ~~compensation~~consider ~~and~~whether ~~service~~it ~~earned~~holds ~~while~~an ~~employed~~implicit byvariable ~~NYSEG. The~~interest ~~amount~~in ofa ~~any~~variable ~~benefit~~interest ~~payable~~entity ~~under~~(VIE) ~~the~~or ~~Plan~~potential toVIE. aSince ~~Transferred~~the ~~Person~~Partnership ~~will be~~already ~~offset~~has byadopted ~~the~~FIN ~~amount~~46(R), ofthe ~~any~~FSP ~~benefit~~will ~~payable~~be toeffective ~~such~~in ~~Transferred Person under~~ the ~~Retirement~~first ~~Plan~~reporting ~~for~~period ~~Employees~~beginning after ofMarch ~~NYSEG~~3, 2005. ~~Effective~~The ~~May~~Partnership ~~29,~~is currently ~~1999,~~evaluating the ~~ability to~~effect ~~commence~~of ~~participation~~adoption inof ~~the~~FSP ~~Plan~~FIN ~~and~~46(R)-5, ~~the~~but ~~accrual~~does ofnot ~~benefits under the~~expect ~~Plan~~the ~~ceased~~adoption ~~with respect~~ to ~~non-collectively~~have ~~bargained~~a ~~people~~material ~~and~~effect on the ~~accrued benefits~~Partnership’s offinancial ~~any~~condition or ~~such~~results ~~participant were fixed as~~ of ~~such date~~operations.

1311

Total Pension cost for the six months ended June 30, 2004 and 2003, respectively, include the following components: (In thousands)

	Six Months ended June 30, 2004		Six Months ended June 30, 2003
Service cost	342		183
Interest cost	815		806
Expected Return on Plan Assets	(530	)	(363	)
Amortization of net (gain) loss	—		—
Total Pension Cost	627		626

On April 10, 2004, President Bush signed into law the Pension Funding Equity Act of 2004. This Act allows the Partnership to temporarily replace the 30-Year bond rate with a composite of long- term corporate bonds for determining the Partnership’s minimum required quarterly contributions. Because of this change, the scheduled cash flows for employer contribution have changed from the Partnership’s original estimate of required quarterly contributions of $1.5 million to approximately $773,000.

Note 9. Reclassifications

Certain ~~2003~~2004 amounts have been reclassified on the condensed ~~consolidated~~ consolidated financial statements to conform with the ~~2004~~2005 presentation.

Note 10. Subsequent Events

~~Cash~~On ~~flow~~April ~~from~~29, ~~the Partnership’s~~2005, ~~operations~~as ~~during~~agreed ~~the~~to ~~first~~under ~~half~~the ofConsent ~~2004~~Decree, ~~was~~the ~~sufficient~~AES ~~to cover~~Entities ~~the~~have ~~aggregate~~paid ~~rental~~a ~~payments~~$700,000 ~~under~~civil ~~the~~penalty ~~leases~~for on the ~~Somerset~~violations ~~Plant~~assessed ~~and~~to ~~the Cayuga~~NYSEG ~~Plant~~and ~~due July 2~~deposited $1, ~~2004. On this date~~000,000 ~~rental~~in ~~payments~~an ~~were~~AES ~~made~~Environmental inMitigation ~~the amount~~Project ~~of $31 million~~Account.

Cash flow from operations in excess of the aggregate rental payments under the Partnership’s leases may be distributed to the Partners of the Partnership if certain criteria are met. On July 8, 2004, the Partnership made a distribution payment of $41.2 million.12

The Partnership borrowed $14.3 million on July 9, 2004, for working capital purposes under the $35 million secured revolving working capital and letter of credit facility with Union Bank of California, N.A. The borrowing was at an interest rate of 5.75%. The Partnership repaid the entire $14.3 million on July 26, 2004.

Item 1. Condensed Consolidated Financial Statements (Unaudited)

AES NY, L.L.C.

Condensed Consolidated Balance Sheets ~~June 30, 2004 and December 31, 2003~~

March 31, 2005 and December 31, 2004

(Amounts in Thousands)

	June 30, 2004		December 31, 2003
	March 31,		December 31,
	2005		2004
ASSETS
Current Assets
Restricted cash:
Operating – cash and cash equivalents	$	3,972	$	2,932
Operating - cash and cash equivalents	$	25,994	$	2,431
Revenue account	7718,~~632~~762		8559,~~231~~218
Accounts receivable – trade	35,916		34,883
Accounts receivable - trade	47,063		42,112
Accounts receivable – affiliates	2,966		2,969
Accounts receivable - affiliates	3,752		3,717
Accounts receivable – other	982		1,280
Accounts receivable - other	737		872
Derivative valuation asset – current	184		8,153
Derivative valuation asset - current	21		1,239
Inventory	3435,~~205~~759		2738,~~700~~317
Prepaid expenses	611,~~522~~032		8,~~117~~360
Total current assets	~~162~~143,~~379~~120		~~171~~156,~~265~~266
Property, Plant, Equipment and Related Assets
Land	8,~~748~~768		78,~~503~~748
Electric generation assets (net of accumulated depreciation of $227,596 and $161,784)	913,116		902,663
Electric generation assets (net of accumulated depreciation of $256,927 and $247,632)	895,669		904,218
Total property, plant, equipment and related assets	~~921~~904,~~864~~437		~~910~~912,~~166~~966
Other Assets
Deferred financing (net of accumulated amortization of $1,091 and $863)	523		303
Deferred financing (net of accumulated amortization of $1,047 and $892)	1,935		2,090
Derivative valuation asset	—166		72,~~990~~773
NYISO working capital fund	1,~~469~~548		—1,494
Rent reserve account	31,~~717~~346		31,717
Total Assets	$	1,~~117~~082,~~952~~552	$	1,~~121~~107,~~441~~306
LIABILITIES AND MEMBER’S EQUITY
Current Liabilities
Accounts payable	$	~~1,443~~823	$	~~833~~1,653
Lease financing – current	5,237		7,846
Lease financing - current	4,649		4,411
Other long-term debt – current	2,275		347
Other long-term debt - current	2,413		2,459
Accrued interest expense	2713,~~835~~865		2827,~~004~~663
Derivative valuation liability – current	64,314		26,043
Derivative valuation liability - current	121,593		82,125
Transmission congestion contract	377		359
Due to The AES Corporation and affiliates	13,157		13,092
Due to The AES Corporation and affiliates	8,779		9,096
Accrued coal and rail expenses	9,520		7,431
Accrued coal and rail expenses	9,111		6,456
Environmental remediation - current	332		332
Other liabilities and expenses	16,170		9,787
Loss Contingency	1,700		1,700
Total current liabilities	135,541		88,771
Other liabilities and expenses	19,738		16,900
Total current liabilities	187,790		157,766
Long-term Liabilities
Lease financing – long-term	628,585		629,815
Long-term debt Lease - non-current	623,936		625,404
Other long-term debt – noncurrent	17,688		744
Other long-term debt - non-current	15,874		16,411
Environmental remediation	6,~~800~~528		6,~~800~~528
Defined benefit plan obligation	1513,~~663~~501		1713,~~238~~920
Derivative valuation liability – non-current	86,675		17,581
Derivative valuation liability - non-current	58,758		38,151
Asset retirement obligation	1012,~~652~~073		1011,~~299~~845
Other liabilities	21,~~039~~948		1,~~944~~907
Total long-term liabilities	~~768~~732,~~102~~618		~~684~~714,~~421~~166
Total Liabilities	~~903~~920,~~643~~408		~~773~~871,~~192~~932
Commitments and Contingencies (Note 4)
Minority Interest	~~212~~160,~~166~~523		~~344~~233,~~767~~020
Member’s Equity	21,~~143~~621		32,~~482~~354
Total Liabilities and Member’s Equity	$	1,~~117~~082,~~952~~552	$	1,~~121~~107,~~441~~306

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

1513

Item 1. Condensed Consolidated Financial Statements (Unaudited)

Note 1. Organization

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).

AES NY3, L.L.C., an indirect wholly owned subsidiary of AES, acquired the stock of the Somerset Railroad Corporation (SRC), which owns short line railroad assets used to transport coal and limestone. AEE has entered into a contract with SRC pursuant to which it will haul coal and limestone to ~~the~~ AEE’s Somerset coal-fired electric generating station(Plant) and make its rail cars available to transport coal to ~~the~~AEE’s 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. AEE has concluded that under the revised Financial Accounting Standards Board (FASB) interpretation No. 46(R), “Consolidation of Variable Interest Entities”, that AEE needs to consolidate SRC into its consolidated financial statements as of January 1, 2004. (See Note 7)

Note 2. Unaudited Condensed Consolidated Balance Sheets

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

The consolidated balance sheets include the accounts of AES NY, L.L.C., AEE, ACR (including all subsidiaries) and SRC. The balance sheets are presented on a consolidated basis because the Company, as general partner, controls the operations of AEE, SRC and ACR. The 99% limited partner ownerships of AEE and ACR are presented as minority interest.

The accompanying unaudited condensed consolidated balance sheets of the Company reflect all adjustments which are necessary, in the opinion of management, for a fair presentation of the Company’s consolidated financial position for the interim periods. All such adjustments are of a normal recurring nature. The unaudited condensed consolidated balance sheets should be read in conjunction with the Company’s consolidated balance sheet and notes contained therein, as of December 31, ~~2003~~ 2004, which are set forth in the Annual Report on Form 10-K of AEE for the year ended December 31, ~~2003~~2004.

Note 3. Plants Placed on Long-Term Cold Standby

During the fourth quarter of 2000, ACR placed its AES Hickling and AES Jennison plants (ACR Plants) on long-term cold standby. The long-term cold standby designation means that these plants require more than 14 days to be brought on-line. The Company continues to evaluate the future of these plants.

Note 4. Commitments and Contingencies

Coal Purchases – ~~In connection with the acquisition by~~ AEE ofhas ~~its four~~ coal~~-fired~~ ~~electric~~purchase ~~generating stations (the AEE Plants)~~commitments, ~~AEE~~composed ~~assumed~~of ~~from New~~short ~~York~~and ~~State~~medium ~~Electric~~term &contracts ~~Gas~~with ~~Corporation~~various ~~(NYSEG)~~mines, anranging ~~agreement~~between to$86.3 ~~purchase~~million ~~the~~and ~~coal~~$105.5 ~~required~~million byfor ~~the~~2005 ~~AEE~~and ~~Somerset~~$65 million and ~~Cayuga plants~~$79.6 ~~The~~million ~~contract~~for ~~expired~~2006. onAs of March ~~December~~ 31, ~~2003.~~2005, ~~The~~the ~~Company~~remaining ~~can~~anticipated ~~provide~~coal nopurchase ~~assurances~~commitments ~~that~~for ~~AEE~~the ~~will be~~year ~~able~~ending toDecember ~~enter~~31, ~~into~~2005 ~~other~~are ~~agreements~~between on$65.1 ~~terms~~ and ~~conditions~~$79.6 ~~that are as favorable as this agreement~~million.

AsAES ofOdyssey, ~~the~~LLC ~~acquisition date of the AEE Plants~~(Odyssey), ~~the~~ ~~contract~~a ~~prices~~wholly ~~for~~owned ~~the~~subsidiary ~~coal~~of ~~purchases~~AES, ~~through 2002 were above the market~~in ~~price,~~concert ~~and~~with AEE, ~~recorded~~is using a ~~purchase~~strategy ~~accounting~~of ~~liability~~varying-term ~~for~~contracts ~~approximately~~with ~~$15.7~~multiple ~~million~~suppliers ~~related~~ to develop the ~~fulfillment~~flexibility ofin ~~its~~the ~~obligation~~supply tochain ~~purchase coal under this agreement. The purchase accounting liability was amortized as a reduction~~ to ~~coal~~ ~~expense~~best ~~over~~meet the demands ~~life~~ of ~~the~~a ~~underlying~~fleet ~~contract. As~~ of ~~December 31, 2003,~~merchant ~~the purchase accounting liability was fully amortized~~plants.

~~AEE~~Line ~~has~~of Credit Agreement – ~~expected~~As ~~coal~~of ~~purchases~~March 31, ~~composed~~2005, of ~~short~~the ~~and~~$75 ~~medium~~million ~~term~~committed ~~contracts~~under ~~with~~the ~~various~~Calyon ~~mines~~Credit Facility, ~~ranging~~AEE ~~between~~had ~~$97.9~~obtained ~~million~~letters ~~and~~of credit of $~~101~~74.46 million, ~~for~~which have ~~2004~~been ~~and $78~~provided ~~million~~as ~~and~~additional ~~$110~~margin ~~million~~to ~~for~~support ~~2005~~normal, ongoing hedging activities with a number of counterparties.

As of ~~June 30~~March 31, ~~2004~~2005, of the ~~remaining anticipated~~$95 ~~coal~~million ~~purchase~~credit ~~commitments~~support ~~for~~authorized by the ~~year~~AES ~~ending~~Board ~~December 31~~of Directors, ~~2004~~ ~~are~~AEE ~~between~~had ~~$47.3~~obtained ~~and~~letters of credit of $5049.8 5 million, which have been provided as additional margin to support normal, ongoing hedging activities with a number of counterparties.

On September 4, 2003, AEE and AES Odyssey, L.L.C.(Odyssey), a wholly owned subsidiary of AES, amended their contract pursuant to which Odyssey provides energy marketing services to include management of AEE’s coal and environmental emission credit inventories. AEE has also agreed to increase the fees paid to Odyssey to $400,000 per month from $300,000 per month.

Odyssey, in concert with AEE, is using a strategy of varying-term contracts with multiple suppliers to develop the flexibility in the supply chain to best meet the demands of a fleet of merchant plants.

Transmission Agreements - On August 3, 1998, the Company entered into an agreement with NYSEG 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 AEE Plants. In accordance with its plan, as of the acquisition date, AEE discontinued using this service. AEE did not transmit over these lines but was required to pay the monthly fees until the effective cancellation date, November 19, 1999.

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 has the right under a Remote Load Wheeling Agreement (RLWA) to transmit 298 megawatts (MW) over firm transmission lines from the Somerset Plant. AEE has the right to designate alternate points of delivery on NIMO’s transmission system provided that AEE shall not be entitled to receive any transmission service charge credit on the NIMO system.

The transmission congestion 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 Independent System Operator (NYISO) in western New York and the more heavily populated areas in eastern New York. The agreement is a financially settled contract since there is no requirement to flow power under this agreement. The agreement generates gains or losses from exposure to shifts or changes in market prices. AEE recorded losses of approximately $2.4 million and approximately $6.4 million in the first six months of 2004 and 2003, respectively, related to this contract. The transmission congestion contract is accounted for as a derivative under Statement of Financial Accounting Standards (SFAS) No. 133.

On June 25, 2003, AES Somerset, L.L.C.(the subsidiary of AEE that operates the Somerset Plant) filed a complaint against NIMO with the FERC. The complaint involves outstanding station service charges for the period April 2000 to May 2003. AES Somerset has calculated that the outstanding charges owed are $290,000, while NIMO has calculated that the outstanding charges are $3.6 million. In December 2003, FERC reiterated its 2001 ruling that independent power plants can net station service power in the AES Somerset and Nine Mile orders. NIMO is appealing the ruling. As of June 30, 2004, AES Somerset has accrued approximately $1.6 million for these charges.

Line of Credit Agreement – On November 20, 2002, AEE signed an agreement with Union Bank of California, N.A. for a one-year extension of its current working capital and letter of credit facility. On April 16, 2003, AEE amended its November 20, 2002 credit agreement with Union Bank of California, N.A. The amendment includes another one-year extension of the current facility; the maturity date of the working capital and letter of credit facility is now January 2, 2005. The amendment also increases Union Bank of California’s commitment from $15 million to $20 million. On April 25, 2003, AEE further amended its November 20, 2002 agreement with Union Bank of California, N.A. The amendment includes a commitment from Citibank, N.A. for the remaining $15 million of the facility. There have been three borrowings under this facility. The first borrowing was $9.7 million on January 10, 2003 at an interest rate 5.75%. This borrowing was repaid in full on January 28, 2003. The second borrowing was for $9.7 million on July 9, 2003 at an interest rate of 5.5%. This borrowing was repaid in full on July 25, 2003. The third borrowing was for $12.9 million and an additional $1 million on January 9, 2004 and February 20, 2004, respectively, at an interest rate of 5.5%. This borrowing was repaid in two payments, $6.2 million on January 27, 2004 and the remaining balance of $7.7 million was repaid on February 26, 2004. As of June 30, 2004, of the $35 million committed, AEE had obtained letters of credit of $16.4 million, which have been provided as additional margin to support normal, ongoing hedging activities with a number of counterparties.

AES on January 6, 2003 and February 25, 2003 authorized AEE to issue letters of credit to counterparties on its $350 million senior secured revolving credit facility to the amount of $25 million and $35 million for the years of 2003 and 2004, respectively.

On February 12, 2004, AEE signed a two-year agreement, effective January 1, 2004, with AES to obtain up to $35 million and $25 million dollars of letters of credit or cash collateral for 2004 and 2005, respectively. This agreement supercedes the authorization of AES on February 25, 2003. The agreement limits the letters of credit amounts and cash collateral to the stated amounts and set into place a fee structure and repayment terms.

AES on April 28, 2004, authorized AEE to provide letters of credit to counterparties on its $450 million senior secured revolving credit facility to the amount of an additional $35 million as margin to support normal, ongoing hedging activities. AES also agreed that the maximum amount of letters of credit that AEE could provide, under this authorization, on the AES facility would be $95 million from April 28, 2004 until December 31, 2004 and $60 million from January 1, 2005 until December 30, 2005. As of June 30, 2004, AEE has obtained letters of credit in the amount of $77 million, which have been provided as additional margin to support normal, ongoing hedging activities with a number of counter-parties.

In December 2003, the NYISO adopted changes to its credit policy. Previously, the working capital fund was collected from the load side of the marketplace. The recent change now collects the fund from both the load and supply sides based on a 50/50% ratio. Actual working capital obligation is based on a participant’s net market activity per the total activity of the market. This obligation is eligible to receive interest and is adjusted each year based on a participant’s net activity from the previous year. Further, if a participant leaves the marketplace, it is reimbursed its working capital contribution. AEE’s working capital contribution is estimated to be approximately $1.5 million and was deducted from monies owed AEE in the first six months of the year. As of June 30, 2004, the entire amount has been deducted.

Environmental - The Company has recorded a liability for environmental remediation associated with the acquisition of the AEE Plants and the ACR Plants. On an ongoing basis, the Company monitors its compliance with environmental laws. Due to 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 (NYSDEC) 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 NYSDEC. This information was sought in connection with the Attorney General’s and the NYSDEC’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.14

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

By letter dated May 25, 2000, the NYSDEC issued a Notice of Violation (NOV) to NYSEG for violations of the Clean Air Act and the New York Environmental Conservation Law at the Greenidge and Westover Plants related to NYSEG’s alleged failure to undergo an air permitting review for repairs and improvements made during the 1980s and 1990s, which was prior to ~~the~~AEE’s acquisition of the AEE Plants. Pursuant to the purchase agreement relating to the acquisition of the Plants from NYSEG, AEE agreed to assume responsibility for environmental liabilities that arose while NYSEG owned the Plants. ~~On September 12, 2000, AEE agreed with NYSEG that AEE will assume the defense of and responsibility for the NOV,~~ subject to acertain ~~reservation of its right to assert applicable~~ exceptions ~~to its contractual undertaking to assume preexisting environmental liabilities~~.

On January 11, 2005, three subsidiaries which AEE iscontrols ~~currently~~and intwo ~~negotiation~~subsidiaries ~~with~~controlled ~~both~~by ~~the~~ACR (collectively, ~~EPA~~the ~~and~~“AES ~~NYSDEC.~~Entities”) Ifentered into a ~~settlement~~consent isagreement ~~not~~to ~~reached,~~settle ~~the~~all ~~EPA~~outstanding NOVs and ~~NYSDEC~~civil claims that could ~~issue AEE~~have abeen ~~notice~~brought orby ~~notices~~the State of ~~violations~~New orYork against ~~file~~the aAES ~~complaint~~Entities inand ~~court~~NYSEG ~~alleging~~ for the alleged violations of the new source review and new source performance standard provisions of the Clean Air Act and its applicable regulations, similar provisions under the New York Environmental Conservation Law and its applicable regulations, common law, and State Executive Law (Consent Decree). IfThe Consent Decree became effective on March 29, 2005, when it was signed and entered by the ~~Attorney~~United ~~General~~States District Court for the Western District of New York. Under the terms and conditions of the Consent Decree, ~~NYSDEC~~upon orentering into effect, the ~~EPA~~State ~~does~~of ~~file~~New anYork ~~enforcement~~covenants ~~action~~not to sue and releases the AES Entities and NYSEG from alleged violations under the above-mentioned air emission laws and regulations and also covenants not to sue or bring any administrative enforcement actions against the ~~Somerset,~~participating subsidiaries ~~Cayuga,~~for ~~Westover~~claims under the above-mentioned air emission laws and regulations associated with work required pursuant to the Consent Decree or other ~~Greenidge~~changes at the Plants commenced after entry of the Consent Decree, ~~then~~but prior ~~penalties~~to ~~may~~December 31, 2009 and completed by December 31, 2010. Under the Consent Decree, the AES Entities behave ~~imposed~~agreed to pay a $700,000 civil penalty for the violations assessed to NYSEG and ~~further~~will ~~emissions~~deposit ~~reductions~~$1,000,000 ~~might~~in bean ~~necessary~~AES atEnvironmental ~~these~~Mitigation ~~Plants~~Project ~~which~~Account ~~could~~that ~~require~~will ~~AEE~~be used to ~~make~~carry ~~substantial~~out ~~expenditures.~~one ~~AEE~~or ismore ~~unable~~projects pertaining to ~~estimate~~energy efficiency, renewable energy and/or clean air projects that are approved by the ~~effect~~NYSDEC and the Office of ~~such~~the anAttorney General. The Consent Decree does not address the Somerset and Cayuga Plants, and it is possible that these two Plants may be subject to a separate enforcement action onfiled ~~its~~either ~~financial~~by ~~condition~~the orEPA, ~~results~~NYSDEC, ofor ~~future~~the ~~operations~~New York State Attorney General.

On Westover Unit 8, the AES Entities are obligated under the Consent Decree to take one of the following three actions by December 31, 2009 and to notify the NYSDEC of which action they elect to take by June 1, 2007: (i) control NOx and SO2 using technology similar to the MCP Project on Greenidge Unit 4, (ii) repower with a non-coal fuel source or (iii) cease operations. Beginning in 2005 and lasting through 2009, Westover Unit 8 is subject to a declining SO2 emissions cap that starts with a cap in 2005 and declines each year until 2009. Should they elect to install emission control technology on Westover Unit 8 by December 31, 2009, then they are obligated under the Consent Decree to use good faith efforts to meet a certain NOx emissions rate and a certain SO2 removal efficiency.

Under the Consent Decree, Greenidge Unit 3 and Westover Unit 7 are required either to (i) install control technology equivalent to Best Available Control Technology or BACT, (ii) be repowered with a non-coal fuel, or (iii) cease operations, no later than December 31, 2009. During the years 2007, 2008, and 2009, these two units will be subject to an annual operating limit of 1,400 hours with an SO2 emission rate of 3.0 lb/mmBtu. Hickling Units 1 and 2 and Jennison Units 1 and 2 are each required either to (i) install BACT-equivalent control technology, (ii) repower using a non-coal fuel or (iii) cease operations no later than May 1, 2007. The Consent Decree does allow the AES Entities to use up to a 30% blend of sub-bituminous (reduced sulfur) coal at either the Greenidge or Westover Plants.

In the event that the AES Entities fail to comply with one or more terms of the Consent Decree, the AES Entities are obligated to pay stipulated penalties that are set forth in the Consent Decree with the exception of noncompliance due to force majeure events or certain material adverse conditions affecting the economic viability of the MCP Project. Upon achieving compliance with the material requirements of the Consent Decree, then the parties to the settlement may petition the court for termination of the Consent Decree. The Company expects that the emission reduction and control technology requirements set forth in the Consent Decree will be incorporated into each Plant’s Title V air operating permit.

AEE has projected that its share of the capital costs to install the MCP Project at Greenidge Unit 4 will be approximately $29 million, however, there can be no assurance that this will be the actual cost since AEE has not entered into an agreement for engineering, procurement and construction of the MCP Project at Greenidge Unit 4.

At this time, the Company has not made decisions regarding the options of either installing pollution control technology, repowering or ceasing operations at the other units subject to the terms of the Consent Decree, and thus the Company is unable to project the potential costs associated with complying with the other provisions of the Consent Decree on its financial condition or the effect on future operations.

The EPA is not a signatory to the Consent Decree, and it is possible that EPA could separately issue the Company a NOV for alleged violations of the federal Clean Air Act and federally enforceable New York air regulations associated with suspected past modifications of plant equipment without undergoing an air permitting review. If EPA does file an enforcement action against Greenidge, Westover, Hickling or Jennison, then penalties may be asserted and further emission reductions might be necessary which could require the Company to make substantial expenditures. The Company is unable to estimate the effect of any EPA-issued NOV on its financial condition or results of future operations.

Nitrogen Oxide and Sulfur Dioxide Emission Allowances - The Plants emit nitrogen oxide (NOx) and sulfur dioxide (SO2) as a result of burning coal to produce electricity.

The AEE and ACR Plants have been allocated allowances by the NYSDEC 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. New York State and ~~the~~20 other states in the Mid-Atlantic and Northeast region ~~are~~and ~~classified~~District asof ~~the~~Columbia ~~Ozone~~are ~~Transport~~subject ~~Region in~~to the federal ~~Clean~~NOx ~~Air~~SIP ~~Act,~~Call rule, which ~~designates~~imposes ~~the~~NOx ~~Ozone~~ozone ~~Transport~~season ~~Region~~emission ~~as not~~reduction ~~being~~requirements inthrough ~~compliance~~an allowance ~~with~~system. Under the ~~ozone~~NOx ~~National~~SIP ~~Ambient~~Call rule, ~~Air~~electric ~~Quality~~generating ~~Standard.~~facilities ~~The states~~are inrequired ~~the~~to ~~Ozone~~hold ~~Transport~~allowances ~~Region~~sufficient to ~~have~~cover ~~agreed~~the toozone ~~implement~~season aNOx ~~three-phase process~~emissions toemitted ~~reduce~~by ~~NOx~~such ~~emissions~~facilities. Each inof the ~~region~~Company’s inPlants ~~order~~is subject to the ~~comply~~NOx ~~with~~SIP ~~the federal~~Call ~~Clean~~rule, ~~Air~~and ~~Act~~the ~~Title~~Company Ihas ~~requirements~~been ~~for~~allocated ~~ozone~~2,492 ~~non-compliance~~NOx ~~areas.~~allowances ~~Implementation~~for of the ~~Phase~~2005 ~~III~~ozone ~~emission~~season. The ~~rules~~NOx SIP Call program commenced on May 131, ~~2003~~2004.

18The AEE and ACR Plants are also subject to SO2 emission allowance requirements imposed by the EPA’s Title IV Acid Rain Program. 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.

~~The~~Both ~~AEE~~NOx and ~~ACR~~SO2 ~~Plants~~allowances ~~are~~may ~~also~~be ~~subject~~bought, tosold or traded. If NOx and/or SO2 ~~emission~~emissions exceed the allowance ~~requirements~~amounts ~~imposed~~allocated byto the ~~EPA.~~AEE ~~Each~~Plants, then ~~SO2~~AEE ~~allowance authorizes~~may need to purchase additional allowances on the ~~emission~~open ofmarket ~~one~~or otherwise ~~ton~~reduce its production of ~~SO2~~electricity ~~during~~to ~~the~~stay ~~calendar~~within ~~year~~the allocated amounts. ~~All~~It ofis expected that if the ~~Plants~~ units are ~~currently~~operated ~~subject~~at toforecasted capacities, ~~SO2~~that ~~allowance~~the ~~requirements,~~cost of NOx and ~~are~~SO2 ~~required~~allowances towill not be materially ~~hold~~different ~~sufficient~~than ~~allowances~~the topreceding ~~emit~~year. In 2002, ACR sold all its SO2 and NOx allocations for 2005.

~~Both~~The ~~NOx~~State ~~and~~of ~~SO2~~New ~~allowances~~York’s ~~may~~Acid Deposition beReduction ~~bought,~~Program’s ~~sold or traded. If~~ NOx ~~and/or~~ ~~SO2~~regulations ~~emissions~~became ~~exceed~~effective ~~the~~October ~~allowance amounts allocated to the AEE Plants~~1, ~~then~~2004, ~~AEE~~and ~~may need to purchase additional allowances on~~ the ~~open~~SO2 ~~market~~regulations ~~or otherwise~~were ~~reduce~~phased ~~its~~in ~~production~~January of1, ~~electricity~~2005, towith ~~stay within the allocated~~full ~~amounts.~~implementation ~~It is expected that AEE may have an allowance shortfall during 2004 of approximately 12,500~~ to ~~14,500~~be ~~SO2~~completed ~~allowances~~by ~~and~~January ~~approximately~~ 1,~~650~~ to2008. ~~1,850 NOx~~AEE’s ~~allowances~~compliance ~~assuming the units are operated at forecasted capacities. At~~strategy ~~June~~involves ~~30,~~reduced ~~2004,~~operations ~~market~~from ~~prices~~ the ~~cost~~Plants’ ~~could~~non-reheat ~~range~~units, ~~from $9.1 million to $10.4 million to~~reducing ~~purchase~~emission ~~sufficient~~rates ~~SO2~~ and/or ~~NOx~~the ~~allowances~~selling/buying ~~for~~or ~~2004.~~trading Inof ~~2002,~~New ~~ACR~~York ~~sold~~State ~~all its~~ SO2 and NOx ~~allocations for 2004~~allowances.

InOn ~~October 1999~~March 10, 2005, ~~New~~the ~~York~~EPA ~~State~~Acting ~~Governor~~Administrator ~~Pataki~~signed ~~announced~~the anfinal Clear Air Interstate Rule ~~executive~~that ~~order~~will ~~mandating~~require ~~additional~~further emission reductions in NOx and SO2 emitted from ~~New~~power plants ~~York~~and ~~State~~other sources that significantly contribute to fine particulate (“PM2.5”) ~~power~~and ~~plants~~ozone pollution in downwind states. NOx ~~The~~and ~~Governor’s~~SO2 ~~initiative~~are ~~requires~~precursors ~~non-ozone~~of ~~season~~PM2.5, and NOx ~~emission reductions~~is ~~based~~a onprecursor 0of ozone.15 The ~~lbs/Mmbtu~~final ~~starting~~rule indirects ~~2004~~28 states, including New York, to issue new regulations that will require major SO2 and aNOx ~~50%~~reductions ~~reduction~~by ~~from~~2015. States ~~the~~must ~~power~~achieve ~~plants’~~the ~~Title~~required IVNOx and SO2 reductions by meeting a state-specific emissions ~~being~~budget ~~phased~~through one of two compliance methods: (i) requiring electric generating facilities in ~~from~~the ~~2005~~state to ~~2008.~~participate ~~The~~in an EPA-administered cap ~~program~~and ~~will~~trade beregime ~~implemented~~that caps emissions in two phases starting with a first phase starting in 2009 and 2010 for NOx and SO2, respectively and a second phase commencing in 2015, or (ii) meeting the budget levels through measures selected by a ~~market-based~~particular ~~mechanism~~state that are approved by EPA. ~~The~~States ~~rules~~are encouraged to use a ~~implementing~~cap and emission trading approach. At this point, the ~~Governor’s~~Company ~~initiative~~cannot determine (6what ~~NYCRR~~the ~~Parts~~costs ~~237~~would ~~and~~be ~~238)~~to ~~were~~comply ~~adopted~~with new federal SO2 and NOx inemission ~~March 2003~~reduction requirements.

In September 2003, NYSDEC determined the amount of NOx emissions allowances that would be allocated to the Plants. The allocation is several hundred tons less than AEE’s average historical NOx emissions for the AEE Plants during the control period. AEE’s compliance plan cannot be finalized until the anticipated New York NOx market allowance prices are more conclusively determined. ACR currently has NOx allowance surpluses since the Jennison and Hickling Plants have been placed on long-term cold stand-by.16

InOn ~~January 2004~~March 15, ~~NYSDEC~~2005, ~~determined~~the EPA Acting Administrator signed the ~~amount~~final ofClear Air ~~SO2~~Mercury Rule that regulates mercury emissions from existing and new coal-fired power plants. The final rule ~~allowances~~requires ~~that~~the ~~would~~reduction of mercury emissions to be ~~allocated~~achieved ~~for~~through a cap and emission trading program with the ~~Plants.~~first ~~The~~phase ~~allocation~~commencing isin ~~several~~2010 and the second phase ~~thousand~~starting ~~tons~~in ~~less~~2018. ~~than~~Instead ~~AEE’s~~of ~~average~~participating ~~historical~~in ~~SO2~~the ~~emissions~~national ~~for~~trading program, states can alternatively establish their own rules as the ~~AEE~~state does not exceed ~~Plants~~its mercury emissions budget. ~~AEE’s~~The ~~compliance~~Clean ~~plan~~Air ~~cannot~~Mercury Rule is expected to be legally ~~finalized~~challenged ~~until~~by a coalition of states that includes the ~~anticipated~~State of New York after ~~SO2~~the ~~market~~final ~~allowance~~rule ~~prices~~is ~~are~~published ~~more~~in ~~conclusively~~the ~~determined~~Federal Register. ~~ACR~~The Clean Air Mercury ~~currently~~Rule ~~has~~is ~~SO2~~expected ~~allowance~~to ~~surpluses~~be ~~since~~legally challenged by a coalition of states that includes the ~~Jennison~~State ~~and~~of ~~Hickling~~New ~~Plants~~York after the final rule is published in the Federal ~~have~~Register. ~~been~~At ~~placed~~this onpoint, ~~long-term~~the ~~cold~~Company ~~stand-by~~cannot determine what the costs would be to comply with the new federal mercury emission reductions requirements.

OnIn ~~May~~July ~~26,~~ 2004, the ~~New~~EPA ~~York~~final ~~Supreme~~rule ~~Court~~for ~~struck~~regulating ~~down~~existing ~~the~~power plants ~~regulations.~~under ~~The~~Section ~~Court~~316(b) ~~ruled~~of ~~that~~ the ~~regulations~~Clean ~~had~~Water ~~been~~Act ~~adopted~~was ~~improperly after~~published in the ~~State~~Federal Register. ~~missed~~This arule ~~deadline~~became ~~for~~effective ~~publication~~on ofSeptember a7, ~~notice~~2004. toThis rule ~~inform~~imposes ~~the~~new compliance requirements, ~~public~~with ofpotentially ~~proposed~~significant ~~changes~~costs, inon operating plants across the ~~regulations~~nation with cooling water intake structures. OnCost ~~July 1,~~items ~~2004,~~include ~~NYSDEC~~various environmental and ~~appealed~~engineering studies and potential capital and maintenance costs. The Company has not yet determined the ~~Court’s~~effects ~~ruling~~of this rule on its financial condition or results of operations.

~~AEE~~ACR has ~~voluntarily~~reported ~~disclosed~~that toconcentrations ~~the~~of ~~NYSDEC~~a ~~and~~number ~~EPA~~of onchemicals ~~November 27,~~in a few groundwater ~~2002~~wells ~~that~~increased ~~NOx~~in ~~exceedances~~the ~~appear~~year toending ~~have~~December ~~occurred~~31, on2001, ~~October 30~~which ~~and~~was 31the ~~and~~year after the ~~November 1-8~~Jennison and 10Hickling ofPlants ~~2002.~~were ~~The~~placed ~~exceedances~~on ~~were~~long-term ~~discovered~~cold ~~through~~standby. anA ~~audit~~consultant bywas ~~plant~~retained ~~personnel~~to ofhelp evaluate the ~~Plants’~~source ~~NOx~~of ~~Reasonably~~the ~~Available~~chemicals ~~Control~~and ~~Technology~~provide ~~(RACT)~~recommendations ~~tracking~~for ~~system~~remediation. ~~which~~The ~~monitors~~consultant ~~NOx~~concluded ~~emissions~~the atcause ~~all the~~of ~~Plants~~the ~~subject~~problem towas ~~AEE’s~~coarse ~~NOx~~bottom ~~RACT~~ash ~~Plan.~~with ~~AEE~~pyrites ~~believes~~ that ithad ~~has~~been ~~taken~~exposed ~~all~~to the air ~~reasonable,~~since ~~good~~sluicing ~~faith~~of ~~efforts~~water to ~~assess~~the ~~and~~bottom ~~correct~~ash ~~the~~ponds ~~exceedances. Immediately~~at ~~upon~~both ~~the~~plants ~~discovery~~has ofbeen terminated. ~~the~~ACR ~~exceedances,~~notified ~~the~~NYSDEC ~~Selective~~that ~~Catalytic~~ACR ~~Reduction System~~would ~~(SCR)~~perform remediation at Jennison, where the ~~Somerset~~concentrations ~~Plant~~are ~~was~~the ~~activated~~highest. toThe ~~reduce~~remediation ~~NOx~~will ~~emissions.~~consist of ~~Emission~~removing ~~data~~the ~~indicates~~suspect ~~that~~material in the ~~system~~anticipation ~~had~~that ~~already~~over ~~returned~~time tothe concentrations awill ~~compliant operation~~subside. byThe ~~the~~NYSDEC ~~time~~recently ~~the~~approved ~~error~~ACR’s ~~was~~plan ~~discovered.~~to ~~The~~add additional ~~EPA~~monitoring ~~has~~wells ~~decided~~at Hickling to ~~defer~~allow ACR to better assess changes in the ~~NYSDEC~~ground ~~for~~water ~~review~~that ofhave ~~the~~occurred ~~self-disclosure~~since ~~letter~~use ~~and~~of ~~technical~~the ~~issues.~~pond ~~AEE~~was terminated. isThe ~~unable~~new towells ~~predict~~have ~~any~~been ~~potential~~added ~~actions~~and ormonitoring ~~fines~~of ~~the~~these ~~NYSDEC~~wells ~~may~~has ~~require,~~been ~~if any.~~initiated

~~AEE~~Future ~~voluntarily disclosed to the NYSDEC in~~initiatives ~~January 2003~~regarding ~~that~~ the ~~Cayuga~~impacts ~~Plant~~of ~~had~~greenhouse ~~inadvertently~~gases ~~burned synfuel~~ (~~coal with~~e.g., ~~a latex binder applied~~CO2), ~~which~~emissions and itglobal iswarming ~~not~~continue ~~permitted~~ to ~~burn.~~be ~~AEE~~the ~~had entered~~subject ~~into~~of anintense ~~agreement~~debate. ~~with~~In aresponse ~~supplier~~ to ~~purchase coal. It received~~ ~~approximately~~this ~~one 9~~issue,~~000-ton~~ ~~train~~Northeastern ~~per month from April 24, 2001 to December 27, 2002~~U.S. Instates ~~January 2003,~~(including ~~AEE~~New ~~became~~York) ~~aware that the product~~have ~~the~~agreed ~~Cayuga~~to ~~Plant~~work ~~had~~to ~~been~~develop ~~receiving~~a ~~was~~regional ~~synfuel.~~market-based ~~AEE~~emissions ~~has~~trading ~~suspended~~system ~~all~~to ~~shipments~~reduce ~~from~~power ~~that~~plants’ ~~supplier~~CO2 ~~until a resolution could be reached~~emissions. ~~AEE~~The ~~has reviewed~~goal ~~the~~is ~~emission~~to ~~and~~reach ~~operation~~an ~~data~~agreement ~~which~~in ~~showed there was no adverse~~2005 ~~effect~~on toa ~~air~~cap ~~quality~~and ~~with~~emission-trading ~~respect~~program. toUntil ~~applicable~~such ~~permit~~time ~~emissions~~as ~~limits attributable to burning~~ the ~~material.~~rules ~~AEE~~are developed ~~is unable~~ to ~~predict~~implement ~~any~~such ~~potential actions~~a orprogram, ~~fines~~ the ~~NYSDEC~~Company ~~may~~cannot ~~require,~~determine ifwhat ~~any. In~~its ~~July 2003,~~impact ~~AEE~~would ~~reached~~be anon ~~agreement with~~ the ~~supplier~~Company’s tofinancial ~~resume~~position ~~shipment of~~or ~~coal~~results ~~in order to satisfy contractual obligations. As part~~ of ~~this agreement, the supplier has provided a written guarantee stating that all fuel shipments will be coal~~operations.

In July 2004, the EPA final rule for regulating existing power plants under Section 316(b) of the Clean Water Act was published in the Federal Register. This rule becomes effective on September 7, 2004. This new rule will impose new compliance requirements, with potentially significant costs, on operating plants across the nation with cooling water intake structures. Cost items include various environmental and engineering studies and potential capital and maintenance costs. AEE is evaluating the rule and it has not yet determined the effects, of this rule on its financial condition or results of operations.

In January 2004, the EPA proposed an “interstate air quality rule” ( renamed the “Clean Air Interstate Rule”) that would require further emission reductions in NOx and SO2 emitted from power plants and other sources that significantly contribute to fine particulate (“PM2.5”) and ozone pollution in downwind states. NOx and SO2 are precursors of PM2.5, and NOx is a precursor of ozone. The proposed rule directs 29 states, including New York, to issue new regulations that will require major SO2 and NOx reductions by 2010 and further reductions by 2015. States are encouraged to use a cap and emission trading approach. A final rule is expected to be issued in 2005. At this point, the Company cannot determine what the costs would be to comply with new federal SO2 and NOx emission reduction requirements.

ACR has reported that concentrations of a number of chemicals in a few groundwater wells increased in the year ending December 31, 2001, since the Jennison and Hickling Plants were placed on long-term cold standby. A consultant was retained to help evaluate the source of the chemicals and provide recommendations for remediation. The consultant concluded the cause of the problem was coarse bottom ash with pyrites that had been exposed to the air since sluicing of water to the bottom ash ponds at both plants has been terminated. ACR notified NYSDEC that ACR would perform remediation at Jennison, where the concentrations are the highest. The remediation will consist of removing the suspect material in the anticipation that over time the concentrations will subside. The NYSDEC recently approved ACR’s plan to add additional monitoring wells at Hickling to allow ACR to better assess changes in the ground water that have occurred since use of the pond was terminated. The new wells have been added and monitoring of these wells has been initiated

ACR voluntarily disclosed to the NYSDEC and EPA that it is conducting an investigation based on conflicting reports of suspected materials buried at the Hickling Plant. Field and laboratory studies have not indicated any evidence of waste disposal that poses a serious risk to potential receptors. ACR has notified both the NYSDEC and the EPA of these studies and believes that no further action is required.

Northeastern U.S. states (including New York) have agreed to work to develop a regional market-based emissions trading system to reduce power plants’ CO2 emissions. The goal is to reach an agreement by April 2005 on a cap and emission trading program. Until such time as the rules are developed to implement such a program, the Company cannot determine what its impact would be on the Company’s financial position or results of operations.

In June 2004, the EPA preliminarily designated areas of the country that are in nonattainment with the new PM2.5 and 8-hour ozone standards. None of AEE’s plants are located in a designated PM2.5 nonattainment county. Only the Somerset Plant is located in a county designated nonattainment for the new ozone standard. Until such time as the final rules are developed to implement a program, AEE cannot determine what their impact would be on AEE’s financial position or results of operations.

~~Note~~AEE 5voluntarily disclosed to the NYSDEC and EPA on November 27, 2002 that NOx exceedances appear to have occurred on October 30 and 31 and November 1-8 and 10 of 2002. ~~Price~~ ~~Risk~~The ~~Management~~exceedances were discovered through an audit by plant personnel of the Plant’s NOx RACT tracking system. AEE believes that it has taken all reasonable, good faith efforts to assess and correct the exceedances. Immediately upon the discovery of the exceedances, the SCR at the Somerset Plant was activated to reduce NOx emissions. Recently, the Company learned of a NOV issued by the NYSDEC for the NOx RACT exceedances through a review of the November 2004 release of the EPA’s Enforcement and Compliance History (ECHO) database. The Company has not yet seen the NOV from the NYSDEC. The Company is unable to predict any potential actions or fines the NYSDEC may require, if any.

On September 30, 2004, AEE filed ~~accounts~~a ~~for~~request with the New York State Board on Electric Generation Siting and the Environment seeking clarification and/or an amendment to its ~~derivative~~Certificate ~~instruments~~of Environmental Compatibility and Public Need in ~~accordance~~order to permit it to dispose of coal combustion by-products with ~~SFAS~~trace Noor non-detectable residual ammonia of 2 parts per million or less in the Area 2 portion of the Somerset Plant’s coal ash landfill. The Company expects the ~~133,~~New ~~“Accounting~~York ~~for~~State ~~Derivative~~Board ~~Instruments~~on Electric Generation Siting and ~~Hedging~~the ~~Activities”~~Environment to issue an order addressing this request in 2005.

~~AEE~~Note ~~utilizes derivative financial instruments to hedge commodity price risk~~5. Derivative ~~AEE~~Instruments ~~utilizes electric derivative instruments, including swaps~~ and ~~forwards,~~Hedging to hedge the risk related to forecasted electricity sales over the next two years. The majority of AEE’s electric derivatives are designated and qualify as cash flow hedges. No significant amounts of hedge ineffectiveness were recognized in earnings during the six months ended June 30, 2004.Activities

~~Gains~~As ~~and~~of ~~losses~~March on31, ~~derivatives~~2005, ~~reported~~AEE ~~in accumulated~~has ~~other~~recorded ~~comprehensive~~$180.3 ~~income~~million ~~are~~in ~~reclassified~~accumulated other ~~into~~comprehensive ~~earnings~~loss ~~when~~due ~~the hedged~~to ~~forecasted~~hedging ~~sale occurs~~activities. ~~Amounts~~No ~~recorded~~hedges inwere ~~other comprehensive income~~derecognized ~~(loss)~~or discontinued during the ~~six~~three months ended ~~June 30~~March 31, ~~2004~~2005. ~~were~~No assignificant amounts ~~follows~~of (hedge ineffectiveness were recognized in earnings during the three ~~millions):~~months ended March 31, 2005.

Balance, January 1, 2004	$	(27.6	)
Reclassified to earnings	(22.5		)
Change in fair value	(100.9		)
Balance, June 30, 2004	$	(151.0	)

InGains ~~addition~~and tolosses ~~the~~on ~~electric~~ derivatives ~~classified~~reported asin ~~cash~~accumulated ~~flow hedge~~other ~~contracts,~~comprehensive ~~AEE~~income ~~has~~are areclassified ~~Transmission~~into ~~Congestion~~earnings ~~Contract~~when ~~that~~the ishedged ~~a derivative~~forecasted ~~under~~sale ~~the~~occurs. ~~definition~~Amounts ofrecorded ~~SFAS~~in ~~No.133,~~other ~~but~~comprehensive ~~does~~income ~~not~~(loss) ~~qualify~~during ~~for hedge~~the ~~accounting. This~~three ~~contract~~months isended ~~recorded~~March at31, ~~fair~~2005, ~~value~~were onas ~~the~~follows ~~balance sheet with changes~~ (in ~~the fair value recognized through earnings.~~millions):

Balance, January 1, 2005	$	(116.4	)
Reclassified to earnings	19.9
Change in fair value	(83.8		)
Balance, March 31, 2005	$	(180.3	)

In addition to the electric derivatives classified as cash flow hedge contracts, AEE had a Transmission Congestion Contract that was a derivative under the definition of SFAS No.133, but does not qualify for hedge accounting. This contract, which expired in October 2004 and was not renewed, was recorded at fair value on the balance sheet with changes in the fair value recognized through earnings.

Note 6. Asset Retirement Obligations

InA ~~June 2001,~~reconciliation ~~the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143, which became effective January 1, 2003, requires entities to record the fair value~~ of ~~a legal liability for an~~ asset retirement obligation ~~in the period in which it is incurred. The new~~ liability ~~was recorded~~for ~~beginning in~~ the ~~first~~three ~~quarter~~months ofending ~~2003.~~March ~~The Company capitalized the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period~~31, ~~and~~ ~~the~~2005 ~~capitalized~~was ~~cost~~as isfollows ~~depreciated~~(in over the useful life of the related asset. Upon settlement of the liability, the Company will settle the obligation for its recorded amount or incur a gain or loss upon settlement. The Company adopted SFAS No. 143 effective January 1, 2003.millions):

The Company has completed a detailed assessment of the specific applicability and implications of SFAS No. 143. The scope of SFAS No. 143, as it applies to the Company, includes primarily active ash landfills and water treatment basins. Upon adoption of SFAS No. 143, the Company recorded a liability of approximately $9.6 million and a net asset of approximately $3.3 million, which are included in electrical generation assets, and reversed a $4.2 million environmental remediation liability previously recorded. The difference of the amounts previously recorded and the net SFAS No. 143 liability is a loss recorded as the cumulative effect of a change in accounting principle of $2.2 million. Reconciliation of asset retirement obligation liability for the six months ending June 30, 2004 was as follows (in millions):

Balance, January 1, 2005	$	11.9
Accretion	0.2
Balance, March 31, 2005	$	12.1

Balance, January 1, 2004	$	10.3
Accretion	0.4
Balance, June 30, 2004	$	10.7

Note 7. Long-term Incentive Program

~~Note~~Stock Option 7Plan – Employees of the Company participate in the AES Stock Option Plan (the SOP) that provides for grants of stock options to eligible participants. ~~New~~ Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123,”Accounting ~~Pronouncements~~for Stock-Based Compensation,” prospectively to all employee awards granted, modified or settled after January 1, 2003. Awards under the SOP vest over periods ranging from two to five years.

InNote ~~January 2003, the FASB issued Interpretation No~~8. ~~46, “Consolidation~~New ~~of Variable Interest Entities” which provides guidance on how to~~Accounting identify a variable interest entity (VIE), and when the assets, liabilities, non-controlling interests and results of operations of a VIE need to be included in a company’s consolidated financial statements. This interpretation was revised in December 2003 with the issuance of Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (FIN 46(R)).Pronouncements

Share-Based Payment - In ~~general~~December 2004, the FASB issued a ~~VIE~~revised SFAS isNo.123 an(“SFAS ~~entity~~No. ~~that~~123R”), ~~lacks sufficient~~“Share-Based ~~equity~~Payment”, orwhich ~~its~~is ~~equity~~a ~~holders~~revision ~~lack~~of SFAS ~~adequate~~No. ~~decision~~123. ~~making~~SFAS ~~ability~~No. 123R eliminates the intrinsic value method under Accounting IfPrinciples ~~either~~Board Opinion 25 as an alternative method of ~~these~~accounting ~~characteristics~~for stock-based isawards ~~present,~~by ~~the~~requiring ~~entity~~that isall ~~subject~~share-based payments to aemployees, ~~variable~~including ~~interests~~grants ~~consolidation~~of ~~model,~~stock ~~and~~options ~~consolidation~~for isall ~~based~~outstanding onyears ~~variable interests,~~be ~~not~~recognized onin the ~~ownership~~financial ofstatements ~~the~~based ~~entity’s~~on ~~outstanding~~their ~~voting~~fair ~~stock~~values. ~~Variable interests~~It ~~are~~also ~~defined~~revises asthe fair-value ~~contractual,~~based ~~ownership,~~method orof ~~other~~accounting ~~money~~for ~~interests~~share-based inpayment anliabilities, ~~entity~~forfeitures ~~that~~and ~~change~~modifications ~~with~~of ~~fluctuations~~stock-based inawards ~~the~~and ~~entity~~clarifies SFAS No. 123’s guidance ~~net~~related ~~asset~~to measurement of fair value., ~~The primary~~classifying ~~beneficiary~~an ~~consolidates~~award ~~the~~as ~~VIE;~~equity or ~~the~~as ~~primary~~a ~~beneficiary~~liability isand ~~defined~~attributing ascompensation to reporting periods. In ~~the~~addition, ~~enterprise~~SFAS ~~that~~No. ~~absorbs~~123R aamends ~~majority~~SFAS ofNo. ~~expected~~95, ~~losses~~“Statement orof ~~receives~~Cash aFlows”, to ~~majority~~require ofthat ~~residual~~excess ~~returns~~tax ~~(if~~benefits ~~the~~be ~~losses~~reported oras ~~returns~~a ~~occur),~~financing orcash ~~both~~flow rather than as an operating cash flow.

~~AEE~~The ~~adopted~~Company is required to adopt ~~FIN~~SFAS ~~46(R)~~No. as123R offor ~~January 1,~~the ~~2004~~interim ~~and~~period ~~has~~beginning ~~concluded~~July ~~that~~1, ~~under~~2005 ~~the~~using ~~revised~~a modified ~~Interpretation~~version Noof prospective application. The ~~46(R)~~Company ~~that~~may ~~AEE~~apply ~~needs~~a modified retrospective application to ~~consolidate~~periods ~~SRC~~before ~~into~~the ~~its~~required effective date. ~~consolidated~~The ~~financial~~Company ~~statements~~plans to adopt SFAS No. ~~AEE’s~~123R ~~consolidated~~no ~~Balance~~later ~~Sheet~~than asJuly ~~of June 30~~1, ~~2004~~2005, ~~reflects~~but ~~additional~~has not ~~assets~~determined ofwhat ~~approximately~~method ~~$27~~it will use.3 Management ~~million~~is currently evaluating ~~and~~the ~~liabilities~~effect of ~~approximately~~adoption ~~$18~~of SFAS No.7 ~~million~~123R, asbut does not expect the adoption to have a ~~result~~material effect on the Company’s financial condition, results of operations ~~this~~or cash flows, as the Company had previously adopted income ~~consolidation~~statement treatment for compensation related to share-based payments under SFAS No. 123.

~~The~~On ~~sales~~April 14, ~~– leaseback~~2005, ~~transaction~~the ~~under~~SEC ~~which~~deferred the ~~Somerset~~effective ~~and~~date ~~Cayuga~~of ~~Plants~~SFAS ~~were acquired~~No. ~~qualifies~~123R asuntil ~~a VIE. The sales – leaseback rules require that~~ the ~~leases~~beginning ~~be treated~~of as2006 ~~financing leases~~ for ~~purposes~~calendar ofyear ~~AEE’s financial statements, which they have been from the inception of AEE~~companies.

Asset Retirement Obligations - In ~~December 2003~~ March 2005, the FASB issued ~~SFAS~~FASB Interpretation No. ~~132~~ (~~revised 2003~~FIN), 47 “~~Employers’ Disclosure~~Accounting ~~About~~for ~~Pensions~~Conditional Asset ~~and~~Retirement ~~Other Postretirement Benefits”~~Obligations, ~~which~~an ~~amends~~interpretation ~~SFAS No.~~of ~~87,~~FASB ~~“Employers’~~Statement ~~Accounting for Pensions”, SFAS~~ No. 88143”, ~~“Employers’~~ ~~Accounting~~which ~~for~~clarifies ~~Settlements~~the ~~and~~term ~~Curtailments~~“conditional ofasset ~~Defined~~retirement ~~Benefit~~obligation” ~~Pension~~as ~~Plans~~used ~~and~~in ~~for Termination Benefits”, and~~ SFAS No. ~~106,~~143 “~~Employers’~~ Accounting for Asset ~~Postretirement~~Retirement ~~Benefits Other Than Pensions~~Obligations”~~, and replaces SFAS No~~. ~~132~~Specifically, ~~“Employers’~~ ~~Disclosures~~FIN ~~About~~47 ~~Pensions~~provides ~~and~~that ~~Other~~an ~~Postretirement Benefits”~~asset ~~(collectively~~retirement ~~referred~~obligation tois asconditional ~~“SFAS~~when ~~No.~~either ~~132~~the timing and (~~revised~~or)~~”).~~ ~~SFAS~~method ~~No.~~of settling ~~132~~the ~~(revised) expands~~obligation ~~employers’~~is ~~disclosures~~conditioned ~~about~~on ~~pension~~a ~~and~~future ~~other~~event. ~~post-retirement~~Accordingly, ~~benefit~~an ~~plans~~entity is required to ~~present~~recognize ~~more~~a ~~information~~liability ~~regarding~~for the ~~economic~~fair ~~resources~~value ~~and obligations~~ of ~~such~~a ~~plans~~conditional asset inretirement ~~terms~~obligation ofif the ~~plans’~~fair ~~assets,~~value ~~obligations,~~of ~~cash flows~~the ~~and~~liability ~~net~~can ~~periodic~~be reasonably ~~benefit costs~~estimated. ~~Additionally,~~Uncertainty ~~SFAS~~about ~~No.~~the ~~132~~timing and (~~revised~~or) ~~requires~~ ~~interim-period~~method ~~disclosures~~of settlement ~~regarding~~of ~~plan~~a ~~benefit~~conditional ~~costs~~asset ~~and~~retirement ~~material plan~~obligation ~~changes.~~should ~~The~~be ~~Company~~factored ~~adopted~~ into the ~~new~~measurement ~~annual disclosure requirements~~ of ~~SFAS~~ ~~No.~~the ~~132~~liability ~~(revised)~~when ~~effective~~sufficient asinformation ~~of December 31, 2003~~exists. ~~The~~This ~~interim-period~~interpretation ~~disclosure~~also ~~requirements~~clarifies ~~became~~when ~~effective~~an ~~for~~entity ~~the~~would ~~Company~~have assufficient ofinformation ~~June 30,~~to ~~2004.~~reasonably Asestimate ~~SFAS~~the ~~No.~~fair ~~132~~value ~~(revised)~~of ~~does~~an ~~not~~asset ~~change~~retirement ~~the~~obligation. ~~measurement~~FIN 47 oris ~~recognition~~effective offor ~~pension~~fiscal ~~and~~years ~~other~~ending ~~post-retirement~~after ~~benefit~~December ~~plans as required by SFAS No. 87~~15, ~~SFAS No~~2005. 88Management ~~and~~is currently ~~SFAS~~evaluating ~~No.~~the ~~106,~~effect that adoption of ~~this~~FIN ~~new~~47 ~~standard~~will ~~had no~~have ~~effect~~ on the Company’s ~~consolidated~~ financial ~~statements~~position and results of operations.

2118

~~Note~~Implicit 8Variable Interest Entities - In March 2005, the FASB issued Staff Position (FSP) No. ~~Long~~ FIN 46(R)-~~term~~5, ~~Incentive~~“Implicit ~~Program~~Variable Interests under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities”. This FSP clarifies that when applying the variable interest consolidation model, a reporting enterprise should consider whether it holds an implicit variable interest in a variable interest entity (VIE) or potential VIE. Since AEE already has adopted FIN 46(R), the FSP became effective in the first reporting period beginning after March 3, 2005. AEE is currently evaluating the effect of adoption of FSP FIN 46(R)-5, but does not expect the adoption to have a material effect on AEE’s financial condition or results of operations.

~~Stock~~Note ~~Option Plan – Employees of the Company participate in the AES Stock Option Plan (the SOP) that provides for grants of stock options to eligible participants~~9. Prior to 2003, the Company accounted for the SOP under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in 2002 net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123,”Accounting for Stock-Based Compensation,” prospectively to all employee awards granted, modified or settled after January 1, 2003. Awards under the SOP vest over periods ranging from two to five years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards from the inception of the Company.Reclassifications

~~Note~~Certain ~~9. Subsequent~~2004 ~~Events~~amounts have been reclassified on the condensed consolidated financial statements to conform with the 2005 presentation.

~~Cash flow from AEE’s operations during the~~Note ~~first half of 2004 was sufficient to cover the aggregate rental payments under the leases on the Somerset Plant and the Cayuga Plant due July 2, 2004~~10. ~~On this~~Subsequent ~~date, rental payments were made in the amount of $31 million.~~Events

~~Cash~~On ~~flow~~April ~~from~~29, ~~operations~~2005, inas ~~excess~~agreed ofto under the ~~aggregate~~ ~~rental~~Consent ~~payments~~Decree, ~~under~~the ~~AEE’s~~AES Entities ~~leases~~have ~~may~~paid bea ~~distributed~~$700,000 tocivil ~~the~~penalty ~~partners of~~for ~~AEE~~the ifviolations ~~certain~~assessed ~~criteria~~to NYSEG ~~are~~and ~~met.~~deposited ~~On July 8~~$1, ~~2004~~000,000 ~~AEE~~in ~~made~~an ~~a distribution~~AES ~~payment~~Environmental ofMitigation ~~$41~~Project Account.~~2 million.~~

AEE borrowed $14.3 million on July 9, 2004, for working capital purposes under the $35 million secured revolving working capital and letter of credit facility with Union Bank of California, N.A. The borrowing was at an interest rate of 5.75%. AEE repaid the entire $14.3 million on July 26, 2004.19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information in this Management’s Discussion and Analysis should be read in conjunction with the accompanying condensed consolidated financial statements and the related Notes to the Financial Statements. Forward looking statements in this Management’s Discussion and Analysis are qualified by the cautionary statement in the Forward Looking Statements section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking Statements

Certain statements contained in this Form 10-Q are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date hereof. Forward-looking statements can be identified by the use of forward-looking terminology such as “believe,” “expects,” “may,” “intends,” “will,” “should” or “anticipates” or the negative forms 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 (a) General Development of Business” in our Annual Report on Form 10-K, and you are urged to read this section and carefully consider such factors.

“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 (a) General Development of Business” in our Annual Report on Form 10-K, and you are urged to read this section and carefully consider such factors.

Critical Accounting Policies

As of ~~June 30~~March 31, ~~2004~~2005, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis in AES Eastern Energy L.P.’s Annual Report on Form 10-K for the year ended December 31, ~~2003~~ 2004. The policies disclosed included the accounting for: Revenue Recognition, Property, Plant and Equipment, Contingencies and Derivative Contracts.

~~New~~Results ~~Accounting Pronouncements~~of Operations for the Three Months ended March 31, 2005 and 2004

Asset Retirement Obligations. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143, which became effective January 1, 2003, requires entities to record the fair value of a legal liability for an asset retirement obligation in the period in which it is incurred. The new liability was recorded in the first quarter 2003. We capitalized the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, we will settle the obligation for its recorded amount or incur a gain or loss upon settlement. We adopted SFAS No. 143 effective January 1, 2003.

We have completed a detailed assessment of the specific applicability and implications of SFAS No. 143. The scope of SFAS No. 143, as it applies to us, includes primarily active ash landfills and water treatment basins. Upon adoption of SFAS No. 143, we recorded a liability of approximately $9.2 million and a net asset of approximately $3.4 million, which are included in

electric generation assets, and reversed a $4.2 million environmental remediation liability we had previously recorded. The difference of the amounts previously recorded and the net SFAS No. 143 liability is a loss recorded as the cumulative effect of a change in accounting principle of $1.7 million. Reconciliation of our asset retirement obligation liability for the six months ended June 30, 2004 was as follows (in millions):

Balance, January 1, 2004	$	9.9
Accretion	0.4
Balance, June 30, 2004	$	10.3

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” which provides guidance on how to identify a variable interest entity (VIE), and when the assets, liabilities, noncontrolling interests and results of operations of a VIE need to be included in a company’s consolidated financial statements. This interpretation was revised in December 2003 with the issuance of Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (FIN 46(R)).

In general, a VIE is an entity that lacks sufficient equity or its equity holders lack adequate decision making ability. If either of these characteristics is present, the entity is subject to a variable interests consolidation model, and consolidation is based on variable interests, not on ownership of the entity’s outstanding voting stock. Variable interests are defined as contractual, ownership, or other money interests in an entity that change with fluctuations in the entity’s net asset value. The primary beneficiary consolidates the VIE; the primary beneficiary is defined as the enterprise that absorbs a majority of expected losses or receives a majority of residual returns (if the losses or returns occur), or both.

We adopted FIN 46(R) as of January 1, 2004 and have concluded that under the revised Interpretation No. 46(R) that we need to consolidate the Somerset Railroad Corporation (SRC) into our consolidated financial statements. Our consolidated Balance Sheet as of June 30, 2004 reflects additional assets of approximately $27.3 million and liabilities of approximately $18.7 million as a result of this consolidation.

The sales – leaseback transaction under which the Somerset and Cayuga Plants were acquired qualifies as a VIE. The sales – leaseback rules require that the leases be treated as financing leases for purposes of our financial statements, which they have been from the inception of our Company.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosure About Pensions and Other Postretirement Benefits”, which amends SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, and replaces SFAS No. 132, “Employers’ Disclosures About Pensions and Other Postretirement Benefits” (collectively referred to as “SFAS No. 132 (revised)”). SFAS No. 132 (revised) expands employers’ disclosures about pension and other post-retirement benefit plans to present more information regarding the economic resources and obligations of such plans in terms of the plans’ assets, obligations, cash flows and net periodic benefit costs. Additionally, SFAS No. 132 (revised) requires interim-period disclosures regarding plan benefit costs and material plan changes. We adopted the new annual disclosure requirements of SFAS No. 132 (revised) effective as of December 31, 2003. The interim-period disclosure requirements became effective for us as of June 30, 2004. As SFAS No. 132 (revised) does not change the measurement or recognition of pension and other post-retirement benefit plans as required by SFAS No. 87, SFAS No. 88 and SFAS No. 106, adoption of this new standard will have no effect on our consolidated financial statements.

Results of Operations for the Three Months ended June 30, 2004 and 2003

Results of Operations

(Amounts in Millions)

For the Three Months Ended June 30,	2004			2003			% Change
							%
Energy revenue	$	90.1		$	92.1		(2.2	)
For the Three Months Ended March 31,	2005			2004			Change
Capacity revenue	6.3			7.8			(19.2	)
Energy revenue	$	96.5		$	101.8		(5.2	)
Transmission congestion contract	(0.1		)	(2.6		)	(96.2	)
Capacity revenue	4.0			4.9			(18.4	)
Other	0.9			0.7			28.6
Transmission congestion contract	—			(2.4		)	—
Other	1.6			0.6			—

23Energy revenues for the three months ended March 31, 2005 were $96.5 million, compared to $101.8 million for the comparable period of the prior calendar year, a decrease of 5.2%. Market prices for peak and off-peak electricity were approximately 5.7% and 8.2% higher than the comparable period of the prior calendar year. Demand for peak and off-peak electricity was 1.1% and 2.4% higher than the comparable period of the prior calendar year. The market price and demand numbers were based on statistics obtained from the NYISO. The higher electricity prices were offset by a higher forced outage rate at AES Somerset and lower capacity factors due to higher total production costs at AES Greenidge and AES Westover. Because of the reasons stated, the capacity factor for the three months ended March 31, 2005 were 83.2% compared to 91.2% for the comparable period of the prior calendar year, a decrease of 8%.

~~Energy~~Capacity revenues for the three months ended ~~June 30~~March 31, ~~2004~~2005 were $904.10 million, compared to $924.19 million for the comparable period of the prior calendar year, a decrease of 218.24%. The decrease in ~~energy~~capacity ~~revenues~~revenue is primarily due to ~~Cayuga's~~ ~~Unit~~lower 2prices ~~being off-line~~ for acapacity ~~scheduled~~sales ~~maintenance~~on ~~turbine~~the ~~outage offset~~open ~~by higher~~ market ~~prices and demand. Market prices~~ for ~~peak and off-peak electricity were approximately 14.1% and 6.0% higher than~~ the ~~comparable~~winter capacity period of(November ~~the prior calendar year. Demand for peak and off~~-~~peak~~ ~~electricity~~April) ~~was~~versus ~~4.8% and 3.0% higher than~~ the comparable period of the prior calendar year. ~~The market price and demand numbers were based on statistics obtained from the NYISO.~~

~~Capacity~~Other revenues for the three months ended ~~June~~March 3031, ~~2004~~2005 were $61.36 million, compared to $~~7.8~~600,000 ~~million~~ for the comparable period of the prior ~~calendar~~ calendar year~~, a decrease of 19~~.~~2%.~~ The ~~decrease~~lower in capacity ~~revenue~~factors ~~is primarily~~and ~~due~~continued toforecasted lower ~~prices for~~ capacity factors ~~sales~~at onAES ~~the~~Greenidge ~~open~~and ~~market~~AES ~~for~~Westover ~~the winter~~allowed ~~capacity~~us ~~period~~to ~~(November~~sell -excess ~~April)~~allowances to ~~and~~help offset the ~~summer~~electricity ~~capacity~~revenue ~~period~~loss ~~(May~~from ~~- October) versus~~ the ~~comparable~~lower ~~period~~capacity factors of those ~~the prior calendar year~~Plants.

Transmission congestion contract loss for the three months ended June 30, 2004 was $0.5 million, compared to a loss of $2.6 million for the comparable period of the prior calendar year. This agreement is essentially a swap between the congestion component of the locational prices posted by the NYISO in western New York and the more populated areas in eastern New York. The transmission contract was entered into because it provided a reasonable settlement for resolving a FERC dispute between us and Niagara Mohawk Power Corporation.20

Operating Expenses

For the Three Months Ended June 30,	2004		2003		% Change
					%
Fuel expense	$	38.2	$	34.2	11.7
For the Three Months Ended March 31,	2005		2004		Change
Operations and maintenance	8.6		4.9		75.5
Fuel expense	$	41.3	$	41.8	(1.2	)
General and administrative	15.4		13.8		11.6
Operations and maintenance	5.8		5.3		9.4
Depreciation and amortization	9.7		9.0		7.8
General and administrative	16.0		15.2		5.3
Depreciation	9.7		9.7		—

Fuel expense for the three months ended ~~June~~ March 31, ~~2004~~2005 was $3841.23 million, compared to $3441.28 million for the comparable period of the prior calendar year, ana ~~increase~~decrease of 111.72%. ~~The increase~~Lower inyear-over-year ~~Fuel~~capacity ~~expense~~factors isat ~~primarily~~AES ~~due~~Somerset, toAES ~~higher~~Greenidge ~~coal,~~and ~~SO2~~AES ~~allowance, ammonia~~Westover ~~and~~were ~~limestone~~offset ~~pricing~~by higher coal prices.

Operations and maintenance expense for the three months ended ~~June~~ March 31, ~~2004~~2005 was $85.68 million, compared to $45.9 3 million for the comparable period of the prior calendar year, an increase of 75 9.54%. ~~This~~The increase iswas ~~primarily~~ due to ~~the~~greater ~~scheduled~~year-over-year ~~maintenance~~repairs ~~turbine~~of ~~and boiler~~non-production ~~outage~~equipment at ~~Cayuga~~AES ~~and scheduled maintenance boiler outages at the Westover and Greenidge Plants which do not occur yearly~~Cayuga.

General and administrative expense for the three months ended ~~June 30~~March 31, ~~2004~~2005 was $1516.40 million, compared to $1315.8 2 million for the comparable period of the prior calendar year, an increase of 11 9.62%. This increase is primarily due to increases in property taxes and property and medical insurance costs.

Depreciation ~~and amortization~~ expense for the three months ended ~~June 30~~March 31, ~~2004~~2005 was $9.7 million, compared to $9.7 million for the comparable period of the prior calendar year~~, an increase of 7~~.~~8%. This increase is primarily due to the consolidation of Somerset Railroad’s depreciation of $606,000 and the Over-fired air system installed at Westover in May 2003.~~

Other Expenses

For the Three Months Ended June 30,	2004		2003		% Change
					%
Interest expense	$	14.9	$	14.9	—
For the Three Months Ended March 31,	2005		2004		Change
Interest income	0.5		0.6		(16.7	)
Interest expense	$	14.6	$	14.9	(2.0	)
Interest income	0.5		0.4		25.0

Other Income/Expenses for the three months ended ~~June 30~~March 31, ~~2004~~ 2005 were net expenses of $14.41 million, compared to net expenses of $14.35 million for the comparable period of the prior calendar year, ana ~~increase~~decrease of 02.7%. The decrease is due to lower interest expenses resulting from the cancellation of the AES Letter of Credit Agreement.

Results of Operations for the Six Months ended June 30, 2004 and 2003

Results of Operations

(Amounts in Millions)

For the Six Months Ended June 30,	2004			2003			% Change
Energy revenue	$	190.3		$	194.4		(2.1	)
Capacity revenue	11.3			16.4			(31.1	)
Transmission congestion contract	(2.4		)	(6.4		)	(62.5	)
Other	1.5			1.4			(7.1	)

Energy revenues for the six months ended June 30, 2004 were $190.3 million, compared to $194.4 million for the comparable period of the prior calendar year, a decrease of 2.1%. The decrease in energy revenues is primarily due to Cayuga's Unit 2 being off-line for a scheduled maintenance turbine outage and by lower market prices and by flat demand. Market prices for peak and off-peak electricity were approximately 3.6% and 1.9% lower than the comparable period of the prior calendar year. Demand for peak and off-peak electricity was flat to the comparable period of the prior calendar year. The market price and demand numbers were based on statistics obtained from the NYISO.

Capacity revenues for the six months ended June 30, 2004 were $11.3 million, compared to $16.4 million for the comparable period of the prior calendar year, a decrease of 31.1%. The decrease in capacity revenue is primarily due to lower prices for capacity sales on the open market for the winter capacity period (November - April) and the winter capacity period (May - October) versus the comparable period of the prior calendar year.

Transmission congestion contract loss for the six months ended June 30, 2004 was $2.4 million, compared to a loss of $6.4 million for the comparable period of the prior calendar year. This agreement is essentially a swap between the congestion component of the locational prices posted by the NYISO in western New York and the more populated areas in eastern New York. The transmission contract was entered into because it provided a reasonable settlement for resolving a FERC dispute between us and Niagara Mohawk Power Corporation.

Operating Expenses

For the Six Months Ended June 30,	2004		2003		% Change
Fuel expense	$	80.0	$	70.9	12.8
Operations and maintenance	12.3		9.8		25.5
General and administrative	30.5		27.9		9.3
Depreciation and amortization	19.5		18.0		8.3

Fuel expense for the six months ended June 30, 2004 was $80 million, compared to $70.9 million for the comparable period of the prior calendar year, an increase of 12.8%. The increase in Fuel expense is primarily due to higher coal, SO2 allowance, ammonia and limestone pricing.

Operations and maintenance expense for the six months ended June 30, 2004 was $12.3 million, compared to $9.8 million for the comparable period of the prior calendar year, an increase of 25.5%. This increase is primarily due to the scheduled turbine and boiler outage at Cayuga and scheduled maintenance boiler outages at the Somerset, Westover and Greenidge Plants which do not occur yearly.

General and administrative expense for the six months ended June 30, 2004 was $30.5 million, compared to $27.9 million for the comparable period of the prior calendar year, an increase of 9.3%. This increase is primarily due to increases in property taxes and property and medical insurance costs.

Depreciation and amortization expense for the six months ended June 30, 2004 was $19.5 million, compared to $18 million for the comparable period of the prior calendar year, an increase of 8.3%. This increase is primarily due to the consolidation of Somerset Railroad’s depreciation of $1.2 million and the Over-fired air system installed at Westover in May 2003.

Other Expenses

For the Six Months Ended June 30,	2004		2003		% Change
Interest expense	$	30.0	$	29.5	1.7
Interest income	0.9		1.1		(18.2	)
Gain on derivative valuation	—		0.2		—

Other Income/Expenses for the six months ended June 30, 2004 were net expenses of $29.1 million, compared to net expenses of $28.2 million for the comparable period of the prior calendar year, an increase of 2.7%.

Liquidity and Capital Resources

Operating Activities

Net cash provided by operating activities was $509.49 million for the ~~six~~three months ended ~~June~~March 3031, ~~2004~~2005, compared to $7211.75 million for the comparable period of the prior calendar year, a decrease of 3013.79%. ~~This~~ The decrease ~~reflects~~was ~~the~~due ~~decrease~~to inlower net income ~~due~~(net toof ~~Cayuga~~non-cash 2items) ~~being~~of ~~off-line~~$4.1 ~~for~~ million which was offset by a ~~scheduled~~decrease ~~maintenance~~in ~~turbine~~the ~~outage~~change in current assets and byliabilities ~~lower~~of ~~market~~$2.5 ~~prices~~million. The change in current assets and liabilities was due to an increase in accounts receivables offset by ~~flat demand~~a decrease in inventory and an increase in ~~working~~accrued ~~capital~~expenses.

Investing Activities

Net cash provided by investing activities of $116.58 million for the ~~six~~three months ended ~~June 30~~March 31, ~~2004~~2005 reflects a decrease in our restricted cash accounts of $617.5 million was offset by approximately $1.~~5 million~~1 ~~in NYISO credit reserve and by approximately $3.5~~ million in capital expenditures. In addition to capital requirements associated with the ownership and operation of our Plants, we will have significant fixed charge obligations in the future, principally with respect to the leases relating to the Somerset and Cayuga Plants.

In December 2003, the NYISO adopted changes to its credit policy. Previously, the working capital fund was collected from the load side of the marketplace. The recent change now collects the fund from both the load and supply side based on a 50/50% ratio. Actual working capital obligation is based on a participant’s net market activity per the total activity of the market. This obligation is eligible to receive interest and is adjusted each year based on a participant’s net activity from the previous year. Further, if a participant leaves the marketplace, it is reimbursed its working capital contribution. Our working capital contribution is estimated to be approximately $1.5 million and was deducted from monies owed us in the first six months of the year. As of June 30, 2004, the entire amount has been deducted.

Financing Activities

Net cash used in financing activities for the ~~six~~ three months ended ~~June 30~~March 31, ~~2004~~2005 of $5126.97 million reflects ~~principal payments~~payment onof a distribution to our ~~leases~~partners of $~~4.8~~25 million and ~~payment~~principal ofpayments aon ~~distribution~~lease toobligation ~~our partners~~and other long-term debt of $481.7 million and $119,000, respectively, offset by a Partner’s contribution of $~~197~~149,000 ~~and proceeds from other debt of $1~~.4 ~~million.~~ Cash flow from operations in excess of the aggregate rental payments under our leases is permitted, if certain criteria are met, to be paid in the form of distribution payments to our partners.

OnThe ~~August 14,~~principal ~~2000,~~amount of SRC’s ~~entered~~outstanding ~~into~~indebtedness a on the $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. The current interest rate on the loans under this credit facility is equal to a Base Rate plus 0.750% for the Base Rate loans and LIBOR plus 1.500% for LIBOR loans. The Base Rate was ~~1.50% on June 30, 2004 and LIBOR was 1.59% on that date. The principal amount of SRC’s outstanding indebtedness under this credit facility was~~ approximately $1617.72 million as of ~~June 30~~March 31, ~~2004~~2005.

On November 20, 2002, we signed an agreement with Union Bank of California, N.A. for a one-year extension of our current working capital and letter of credit facility. On April 16, 2003, we amended our November 20, 2002 credit agreement with Union Bank of California, N.A. The amendment includes another one-year extension of our current facility; the maturity date of our working capital and letter of credit facility is January 2, 2005. The amendment also increases Union Bank of California’s commitment from $15 million to $20 million. On April 25, 2003, we further amended our November 20, 2002 credit agreement with Union Bank of California, N.A. The amendment includes a commitment from Citibank, N.A. for the remaining $15 million of our facility. As of June 30, 2004, of the $35 million committed, we had obtained letters of credit of $16.4 million, which have been provided as additional margin to support normal ongoing hedging activities with a number of counterparties.21

~~The~~As ~~AES~~of ~~Corporation~~March on31, ~~January 6~~2005, ~~2003~~of ~~and~~the ~~February 25,~~$75 ~~2003~~million committed under the Calyon ~~authorized~~Credit usFacility, towe ~~provide~~have obtained letters of credit toof ~~counterparties on its~~ $~~350~~74.6 million, which ~~senior~~have ~~secured~~been ~~revolving~~provided ~~credit~~as ~~facility~~additional margin to ~~the~~support ~~amount~~normal, ofongoing ~~$25 million and $35~~hedging ~~million~~activities ~~for~~with ~~the~~a ~~years~~number of ~~2003 and 2004, respectively~~counterparties.

26As of March 31, 2005, of the $95 million credit support authorized by the AES Board of Directors, we have obtained letters of credit of $49.5 million, which have been provided as additional margin to support normal, ongoing hedging activities with a number of counterparties.

OnCash ~~February 12,~~flow ~~2004,~~from weour ~~signed~~operations awas sufficient to cover aggregate rental ~~two-year~~payments ~~agreement,~~under ~~effective~~the leases for Somerset and Cayuga on each of the rent payment dates from the first payment on January 1, ~~2004~~2, ~~with~~2000 ~~The~~through ~~AES~~January ~~Corporation~~2, to2005. We ~~obtain~~believe upthat cash flow from our operations will be sufficient to ~~$35~~cover aggregate ~~million~~rental ~~and~~payments ~~$25~~on ~~million~~each ~~dollars~~rent ofpayment ~~letters~~date ofthereafter. ~~credit~~We oralso ~~cash~~believe ~~collateral~~that ~~for~~our ~~2004~~cash ~~and~~flow ~~2005~~from operations, ~~respectively.~~together ~~This~~with ~~agreement~~amounts ~~supercedes~~we ~~the~~can borrow under ~~authorization~~our of$75 ~~AES~~million onCalyon ~~February 25~~Credit Facility, ~~2003.~~will ~~The~~be ~~agreement~~sufficient ~~limits~~to ~~the~~cover expected capital ~~letters~~requirements over the terms of ~~credit~~the ~~amounts~~leases. ~~and~~If ~~cash~~we ~~collateral~~are required to ~~the~~make unanticipated ~~stated~~capital ~~amounts~~expenditures, our cash flow from operations and ~~sets~~operating ~~into~~income ~~place~~in athe ~~fee~~period ~~structure~~incurred ~~and~~would ~~repayment~~be ~~terms~~reduced.

The AES Corporation on April 28, 2004 authorized us to provide letters of credit to counterparties on its $450 million senior secured revolving credit facility to the amount of an additional $35 million as margin to support normal, ongoing hedging activities. The AES Corporation agreed that the maximum amount of letters of credit that we could provide on the AES facility, under this authorization, would be $95 million from April 28, 2004 until December 31, 2004 and $60 million from January 1, 2005 until December 30, 2005. As of June 30, 2004, we have obtained letters of credit in the amount of $77 million, which have been provided as additional margin to support normal ongoing hedging activities with a number of counterparties.

Credit Rating Discussion

Credit ratings affect our ability to execute our commercial strategies in a cost-effective manner. In determining our credit rating, the rating agencies consider a number of factors. Quantitative factors that appear to have significant weight include, among other things, earnings before interest, taxes and depreciation and amortization (EBITDA); operating cash flow; total debt outstanding; fixed charges such as interest expense and lease payments; liquidity needs and availability and various ratios calculated from these factors. Qualitative factors appear to include, among other things, predictability of cash flows, business strategy, industry position and contingencies. In addition, Standard and Poor’s links our credit rating to the credit rating of The AES Corporation in accordance with their standard policy of linking the credit rating of a wholly owned subsidiary to that of its parent. Our Standard and Poor’s credit rating is currently BB+, the highest non-investment grade rating, which is three notches higher than the credit rating of The AES Corporation. A credit rating is not a recommendation to buy or sell or hold securities and may be revised or withdrawn at any time.

Trigger Events

Our commercial agreements typically include adequate assurance provisions relating to trade credit and some agreements have credit rating triggers. These trigger events typically would give counterparties the right to request additional collateral if our credit ratings were downgraded. Under such circumstances, we would need to post collateral within three days or the counterparties would have the right to suspend or terminate the contract. The cost of posting collateral would have a negative effect on our profitability. If such collateral were not posted, our ability to continue transacting business as before the downgrade would be impaired.

Future Cash Payments for Contractual Obligations

As of March ~~June 30~~31, ~~2004~~2005, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December ~~31,~~ 2003, except for an increase in the 2-3 year category of the Purchase “Take or Pay” Obligations. These increases in the 2-3 years category reflect the increase in coal purchase agreements for the 2005-2006 periods. This increase was from approximately $53 million for 2005 at December 31, ~~2003 to approximately $78 million and $10 million for 2005 and 2006, respectively~~2004.

Future Issues and Other Matters

The following discussion of future issues and other information includes current developments of previously disclosed matters and new issues arising during the period covered by and subsequent to the Consolidated Financial Statements. This section should be read in conjunction with Future Issues and Other Matters in in our Annual Report on Form 10-K for the year ended December 31, ~~2003~~2004.

~~The increases in the prices~~ Because of ~~spot~~higher coal and SO2 ~~allowances~~allowance ~~have~~prices, ~~increased~~the ~~our~~older non-reheat units' of Greenidge and Westover Plants’ total ~~production~~dispatch costs. ~~At times~~are ~~when~~at or higher than the current New York Independent System Operator'’s ~~market~~average ~~price~~dispatch prices as of March 31, 2005. Until either energy pricing increases or there is ~~lower~~a reduction ~~than~~in ~~the~~coal ~~dispatch~~and ~~rate~~SO2 ofallowance prices these units, ~~they~~ will behave ~~dispatched~~a at lower ~~than~~capacity factor ~~total~~versus ~~capacity~~prior oryears. ~~even~~We ~~taken~~are ~~off-line.~~working ~~However,~~to minimize the ~~loss~~effects inof ~~generation~~the ~~revenue~~reduced ~~will~~capacity befactors ~~offset~~with bythe apossible ~~reduction~~sale ~~usage~~of ~~resulting~~excess incoal ~~lower~~and ~~purchases~~the orsale ~~sales~~ of or ~~the~~reduction ~~excess~~of toallowances purchases, therefore we do not think that the ~~market~~reduced capacity factors will have a material impact on our financial position or results of operations.

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

We are exposed to the impact of market fluctuations in the prices 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. Under current contractual margining rights we or our counterparties have the right to ask the right to ask the other party for additional collateral if the exposed Party’s mark-to-market exposure increases.

As of August 9, 2004, of the $120 million of credit available to us, $95 million through AES’s secured credit facility and $35 million (only $25 million available for letter of credit purposes) through our working capital and letter of credit facility with Union Bank of California N.A., we have obtained letters of credit in the amount of $84.8 million. We have $35.4 million remaining which is more than our 95% Confidence Interval Cash Value at Risk (CVaR). If the market were to move 1.65 standard deviations from its current position we would have $20.6 million still available to support normal ongoing hedging activities.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. - We carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and principal financial officer of our General Partner, of the effectiveness of our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15) as of ~~June 30~~March 31, ~~2004~~2005. Our management, including the principal executive officer and principal financial officer of our General Partner, is engaged in a comprehensive effort to review, evaluate and improve our controls; however, management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.

Based upon the controls evaluation performed, the principal executive officer and principal financial officer of our General Partner have concluded that as of ~~June 30~~March 31, ~~2004~~2005, our disclosure controls and procedures were effective to provide reasonable assurance that material information relating to us is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Controls. - In the course of our evaluation of disclosure controls and procedures, management considered certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. Based upon that evaluation, the principal executive officer and principal financial officer of our General Partner concluded that there were no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the ~~second~~ first quarter ended ~~June 30~~March 31, ~~2004~~2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Compliance with Section 404 of the Sarbanes Oxley Act of 2002. Beginning with the year ending December 31, 2006, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report of management with our annual report on Form 10-K. The internal control report must contain (1) a statement of management’s responsibility for establishing and maintaining adequate internal controls over financial reporting for the Partnership, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal controls over financial reporting, (3) management’s assessment of the effectiveness of our internal controls over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not our internal controls over financial reporting are effective, and (4) a statement that our independent auditors have issued an attestation report on management’s assessment of our internal controls over financial reporting.

Management developed a comprehensive plan in order to achieve compliance with Section 404 within the prescribed period and to review, evaluate and improve the design and effectiveness of our controls and procedures on an on-going basis. The comprehensive compliance plan includes (1) documentation and assessment of the adequacy of our internal controls over financial reporting, (2) remediation of control weaknesses, (3) validation through testing that controls are functioning as documented and (4) implementation of a continuous reporting and improvement process for internal controls over financial reporting. As a result of this initiative, we have made and will continue to make changes from time to time in our internal controls over financial reporting.22

28Management will develop a comprehensive plan in order to achieve compliance with Section 404 within the prescribed period and to review, evaluate and improve the design and effectiveness of our controls and procedures on an on-going basis. The comprehensive compliance plan includes (1) documentation and assessment of the adequacy of our internal controls over financial reporting, (2) remediation of control weaknesses, (3) validation through testing that controls are functioning as documented and (4) implementation of a continuous reporting and improvement process for internal controls over financial reporting. As a result of this initiative, we have made and will continue to make changes from time to time in our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See Note 3 to our Condensed Consolidated Financial Statements in Part I.

Item 6. Exhibits ~~and Reports on Form 8-K~~

(a) Exhibits

10.26	Consent Decree dated January 11, 2005 among the State of New York, Erin M. Crotty, Commissioner of the Department of Environmental Conservation of the State of New York, New York State Electric and Gas Corporation, AEE2, L.L.C., et al.

31.1	Certification by Chief Executive Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934

31.2	Certification by Chief Financial Officer Required by Rule 13a-14(a) or 15d– 14(c) of the Securities Exchange Act of 1934

32	Certification Required by Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934

31.1 Certification by Chief Executive Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 193423

31.2 Certification by Chief Financial Officer Required by Rule 13a-14(a) or 15d– 14(c) of the Securities Exchange Act of 1934

32 Certification Required by Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934

(b) Reports on Form 8-K

None

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AES EASTERN ENERGY, L.P.
	By: AES NY, L.L.C., as General Partner
	By:	~~/s/ Daniel J. Rothaupt~~	/s/ Daniel J. Rothaupt
		~~Daniel J. Rothaupt~~	Daniel J. Rothaupt
		~~President~~	President
Date: August 12, 2004		(principal executive officer)
Date: May 13, 2005			(principal executive officer)
	By:	/s/ Amy Conley
		Amy Conley
		Vice President
Date: August 12, 2004		(principal financial officer)
Date: May 13, 2005		(principal financial officer)

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