Fitch Downgrades AES Eastern Energy LP to 'C'

Fitch Ratings has downgraded a total of $433.1 million outstanding secured debt serviced by cash flow from AES Eastern Energy LP (AEE) to 'C' from 'CC.' The downgrade is due to a likely default on AEE's next lease payment due Jan. 3, 2012.

Fitch has taken the following rating actions:

AES Eastern Energy LP

--$165 million outstanding Series 1999-A certificates, due 2017, downgraded to 'C' from 'CC';

--$268 million outstanding Series 1999-B certificates, due 2029, downgraded to 'C' from 'CC'.

Key Rating Drivers

--Insufficient Liquidity: AEE expects to have insufficient cash flow to meet the $30.6 million debt portion of its lease payment on Jan. 3, 2012. AEE has no liquidity facilities available for the shortfall, and used the majority of its six-month debt service reserve for the July 2011 lease payment. Lease payments are used for certificate debt service payments.

--Low Capacity Factors: Dispatch was lower than expected from July to December 2011. Somerset and Cayuga have run at significantly lower than projected capacity factors this year due to eroded energy margins. Greenidge and Westover plants went off-line in March 2011 for economic reasons and have not contributed significantly to cash flow.

--No Sponsor Support Expected: Project sponsor AES Corporation (AES Corp) has indicated that it will not provide loans or equity to AEE to make lease or certificate payments. AES Corporation has no obligation to support the project under the lease structure.

What Could Trigger a Rating Action

--Failure to make a scheduled lease payment will result in a downgrade.

--Additional liquidity and replenishment of reserves sufficient to make scheduled lease payments could improve the rating.

Security

The certificates are issued by two bankruptcy-remote Pass-Through Trusts, which hold the Secured Lessor Notes as their only property. The Secured Lessor Notes are secured by: (i) First priority security interest in the Somerset and Cayuga leases, including the right to receive payments of periodic rent and other payments; (ii) The related undivided interest in the in the leases; (iii) The related Participation Agreements of the leases; (iv) The related Facility Site Lease and Facility Site Sublease; (v) Any sublease; (vi) The related Facilities Support Agreements of the leases; (vii) A portion of the Rent Reserve and Special Rent Reserve Accounts of the leases; (viii) The Coal Hauling Agreement with Somerset Railroad.

Credit Update

There is a high probability that AEE will not have sufficient liquidity to pay the debt portion of its January lease payment, as disclosed to Fitch by AEE management in early December 2011. Recent AEE quarterly financial statements similarly warn of a strong likelihood of default by June 30, 2012 and re-classified all debt service as a current obligation.

In addition, collateral under the leases is currently in jeopardy. As of Dec. 7, 2011, AEE failed to make payments or to obtain a forbearance extension on its $30 million Additional Liquidity Facility provided by an AEE affiliate, AES New York Surety, LLC. These failures allow the affiliate the right to take 100% limited partner ownership of AEE's interest in the project leases. A reduction in any of AEE's ownership of the lease partnership below 51% would be an event of default under the lease agreements.

AEE is a special purpose entity that is indirectly wholly owned by AES Corp, rated 'B+' with a Stable Outlook by Fitch. AEE operates four coal-fired electricity generating facilities with a gross capacity of 1,169 MW, and of those four plants AEE leases two. AEE sells electricity into the spot market at prevailing New York Independent System Operator wholesale market prices.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Rating Criteria for Thermal Power Projects' (June 20, 2011);

--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011).

Applicable Criteria and Related Research:

Rating Criteria for Thermal Power Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=639073

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832

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