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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

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.

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.

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

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

PART I

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PART 1 — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

AES Eastern Energy, L.P.
Condensed Consolidated Statements of Income
For the three months ending March 31, 2003 and March 31, 2002

(Amounts in Thousands)

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

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Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont’d)

AES Eastern Energy, L.P.
Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002

(Amounts in thousands)

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

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Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont’d)

AES Eastern Energy, L.P.
Condensed Consolidated Statements of Cash Flows
For the three months ending March 31, 2003 and March 31, 2002

(Amounts in Thousands)

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

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Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont’d)

AES Eastern Energy, L.P.
Consolidated Statement of Changes in Partners’ Capital
For the three months ended March 31, 2003

(Amounts in Thousands)

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

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Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont’d)

Notes to the Unaudited Condensed Consolidated Financial Statements

Note 1. Unaudited Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements of AES Eastern Energy, L.P. (the Partnership) reflect all adjustments which are necessary, in the 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, 2002 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, 2002.

Note 2. Commitments and Contingencies

Coal Purchases – In connection with the acquisition of the Partnership’s four coal – fired electric generating stations (the Plants), the Partnership assumed from New York State Electric & Gas Corporation (NYSEG) an agreement to purchase the coal required by the Somerset and Cayuga Plants. Each year either party can request renegotiation of the price of one-third of the coal supplied pursuant to this agreement. The supplier requested renegotiation during 2001 for the 2002 lot but the parties failed to reach agreement. The supplier requested renegotiation during 2002 for the 2003 lot plus the 2002 lot for which agreement was not reached. On September 11, 2002, the Partnership and the supplier reached agreement on both of the lots. Therefore, the commitment of the Partnership for 2003 is three lots for the Somerset Plant plus 70% of the anticipated coal usage for the Cayuga Plant. The termination date for the contract is December 31, 2003. No later than June 30, 2003, the parties shall meet to determine if the agreement is to be extended under mutually agreeable terms and conditions. If the agreement is not extended, the Partnership would seek a new coal supplier. The partnership can provide no assurances that it will be able to enter into an agreement on terms and conditions that are as favorable as the current contract.

As of the acquisition date of the Plants, the contract prices for the coal purchased through 2002 were above the market price, and the Partnership recorded a purchase accounting liability for approximately $15.7 million related to the fulfillment of its obligation to purchase coal under this agreement. The purchase accounting liability was amortized as a reduction to coal expense over the life of the underlying contracts. As of December 31, 2003, the underlying contracts were fully amortized.

Based on the coal purchase commitments for the year ended December 31, 2003, the Partnership has expected coal purchases ranging between $70.0 and $100.0 million. Currently, the Partnership does not have any coal purchase commitments for 2004.

As of March 31, 2003, the remaining anticipated coal purchases for the year ending December 31, 2003 were between $45.0 and $75.0 million.

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

The Partnership was informed by NIMO that the Partnership would be responsible for the monthly fees of $500,640 under the existing transmission agreement to the originally scheduled termination date of October 1, 2004. On October 5, 1999, the Partnership filed a complaint against NIMO alleging that the Partnership has a right to non-firm transmission service upon six months prior notice without payment of $500,640 in monthly fees subsequent to the cancellation date of November 19, 1999.

On March 9, 2000, a settlement was reached between the Partnership and NIMO, which was approved by the Federal Energy Regulatory Commission (FERC) on May 10, 2000. According to the settlement, the Partnership will continue to pay NIMO a fixed rate of $500,640 per month during the period of November 20, 1999 to October 1, 2004, and in turn, will receive a form of transmission service commencing on May 1, 2000, which the Partnership believes will provide an economic benefit over the period of May 1, 2000 to October 1, 2004.

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

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The transmission contract is accounted for as a derivative under SFAS No. 133. The transmission contract was entered into because it provided a reasonable settlement for resolving a FERC issue. The agreement is essentially a swap between the congestion component of the locational prices posted daily by the New York ISO (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 a loss of approximately $3.9 million versus income of approximately $6.3 million in the first three months of 2003 and 2002, respectively, related to this contract.

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 facility. As of March 31, 2003, lenders have committed to provide only $15 million of the $35 million secured revolving working capital and letter of credit facility. The Partnership is attempting to obtain commitments for the remaining $20 million. Its financial flexibility may be limited if the Partnership is unable to obtain these commitments or substitute other sources of credit. Under this agreement, the Partnership borrowed $9.7 million on January 10, 2003 at an interest rate of 5.75%. The $9.7 million was repaid in full on January 28, 2003. (Please refer to Note 7 for an update on the commitments to the working capital and letter of credit facility.) As of March 31, 2003, of the $15 million committed, the Partnership had obtained letters of credit of $7.5 million which have been provided as additional margin to counterparties.

The AES Corporation on January 6, 2003 and February 25, 2003 authorized us 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. As of March 31, 2003, the Partnership has letters of credit in the amount of $14 million to support normal ongoing hedging activities with a number of counterparties.

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. Because of the uncertainties associated with environmental compliance and remediation activities, future costs of compliance or remediation could be higher or lower than the amount currently accrued.

The Partnership received an information request letter dated October 12, 1999 from the New York Attorney General, which sought detailed operating and maintenance history for the Westover and Greenidge Plants. On January 13, 2000, the Partnership received a subpoena from New York State Department of Environmental Conservation (DEC) seeking similar operating and maintenance history from the Plants. The Partnership has provided materials responding to the request from the Attorney General and the DEC. This information was sought in connection with the Attorney General’s and the DEC’s investigations of several electricity generating stations in New York that are suspected of undertaking modifications in the past without undergoing an air permitting review.

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

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

The Partnership is currently in negotiation with both the EPA and DEC. If the parties are unable to reach an agreement, the EPA and DEC could issue a notice or notices of violations (NOV) to the Partnership for violations of the Clean Air Act and New York Environmental Conservation Law. If the Attorney General, DEC, 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 a NOV on its financial condition or results of future operations.

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

The Plants have been allocated allowances by the DEC to emit NOx during the ozone season, which runs from May 1 to September 30. Each NOx allowance authorizes the emission of one ton of NOx during the ozone season. New York State and the other states in the Mid-Atlantic and Northeast region are classified as the Ozone Transport Region in the federal Clean Air Act, which designates the Ozone Transport Region as not being in compliance with the ozone National Ambient Air Quality Standard. The states in the Ozone Transport Region have agreed to implement a three-phase process to reduce NOx emissions in the region in order to comply with the federal Clean Air Act Title I requirements for ozone non-compliance areas. Implementation of the Phase III emission rules commences on May 1, 2003. The Phase III NOx regulations set forth a NOx allowance allocation program which gives the partnership 2,516 NOx emission allowances for 2003.

The Plants are also subject to SO2 emission allowance requirements imposed by the EPA. Each SO2 allowance authorizes the emission of one ton of SO2 during the calendar year. All of the Plants are currently subject to SO2 allowance requirements, and are required to hold sufficient allowances to emit SO2.

Both NOx and SO2 allowances may be bought, sold, or traded. If NOx and/or SO2 emissions exceed the allowance amounts allocated to the Plants, then the Partnership may need to purchase additional allowances on the open market or otherwise reduce its production of electricity to stay within the allocated amounts. It is expected that the Partnership may have a shortfall of approximately 7,000 to 8,000 SO2 allowances and approximately 700 to 900 NOx allowances in 2003 assuming the units are operated at forecasted capacities. At current market prices, the cost could range from $1.1 million to $1.3 million and from $4.9 million to $6.3 million to purchase sufficient SO2 and NOx allowances for 2003, respectively.

In October 1999, New York State Governor Pataki announced an executive order mandating additional emission reductions from New York State power plants. The Governor’s initiative requires non-ozone season NOx emission reductions based on 0.15 lbs/Mmbtu starting in 2004, and a 50% reduction from the power plants’ Title IV SO2 emissions being phased in from 2005 to 2008. The program will be implemented through a market-based mechanism. The rules implementing the Governor’s initiative (NYCRR Parts 237 and 238) were adopted in March 2003. The impact of the rules on the Partnership cannot be determined until the State makes its determination as to how many emission allowances will be allocated to each of the Plants. This is not scheduled to occur until September 2003 for NOx allocations and January 2004 for SO2 allocations.

The Partnership voluntarily disclosed to the DEC 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 Plants’ NOx RACT tracking system. The Plants have taken all reasonable, good faith efforts to assess and correct the exceedances. Immediately upon the discovery of the calculation error, the SCR at the Somerset Plant was activated to reduce NOx emissions. Emission data indicates that the system had already returned to a compliant operation by the time the error was discovered. The EPA has decided to defer to the DEC for review of the self-disclosure letter and technical issues. The Partnership is unable to predict any potential actions or fines the DEC may require, if any.

The Partnership voluntarily disclosed to the NYDEC 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 Cayuga Plant had entered into an agreement with a supplier to purchase coal. The Cayuga Plant received approximately one 9,000-ton train per month from April 24, 2001 to December 27, 2002. In January 2003, the Plant became aware that the product it had been receiving was synfuel. The Plants have suspended all shipments from that supplier until a resolution is reached. The Cayuga Plant has reviewed the emission and operation data that showed there was no adverse effect to air quality attributable to burning the material. The Partnership is unable to predict any potential actions or fines the NYSDEC may require, if any.

In April 2002, the EPA proposed to establish location, design, construction and capacity standards for cooling water intake structures at existing power plants. The EPA is developing these regulations under the terms of an Amended Consent Decree in Riverkeeper, Inc vs. Whitman, US District Court, Southern District of New York. It has been reported that EPA reached an agreement in principle with the plaintiffs to propose changes to the 316(b) rulemaking schedule. The new scheduled finalization of the rules for existing facilities has been extended by six months to February 16, 2004. These new rules will impose new compliance requirements, with potentially significant costs, on operating plants across the nation. Cost items include various environmental and engineering studies, and potential capital and maintenance costs. The Partnership has not determined the effects of these regulations on its financial condition.

Note 3. Price Risk Management

Comprehensive Income (Loss) – The Partnership accounts for its derivative instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. In the years prior to the adoption of SFAS No. 133, the Partnership did not have any items of other comprehensive income (loss). The Partnership utilizes derivative financial instruments to hedge commodity price risk. The Partnership utilizes electric derivative instruments, including swaps

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and forwards, to hedge the risk related to forecasted electricity sales over the next four years. The majority of the Partnership’s electric derivatives are designated and qualify as cash flow hedges. No significant amounts of hedge ineffectiveness were recognized in earnings during the three months ended March 31, 2003.

Gains and losses on derivatives reported in accumulated other comprehensive income are reclassified into earnings when the hedged forecasted sale occurs. Approximately, $27.5 million of other comprehensive income is expected to be recognized as an addition to earnings over the next twelve months. Amounts recorded in other comprehensive income (loss) during the three months ended March 31, 2003, were as follows (in millions):

In addition to the electric derivatives classified as cash flow hedge contracts, the Partnership has a Transmission Congestion Contract that is a derivative under the definition of SFAS No.133, but does not qualify for hedge accounting.  This contract is recorded at fair value on the balance sheet with changes in the fair value recognized through earnings. 

Note 4. New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143, which is 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. When a new liability is recorded in 2003, the entity will capitalize 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, the entity settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Partnership adopted SFAS No. 143 effective January 1, 2003.

The Partnership has completed a detailed assessment of the specific applicability and implications of SFAS No. 143. The scope of SFAS No. 143 includes primarily active ash landfills and water treatment basins. Upon adoption of SFAS No. 143, the Partnership recorded a liability of $9.2 million, 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 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 asset retirement obligation liability, for the three months ending March 31, 2003 were as follows (in millions):