AES Eastern Energy Enters Non-Binding Term Sheet for Asset Sale

The parties to this Term Sheet are AES Eastern Energy, L.P., AES Somerset, LLC, AES Cayuga, LLC, AES NY3, LLC, and, to the extent applicable, Somerset Railroad Corporation (“SRC” and, collectively with the preceding entities, “AEE”), the undersigned members of the Ad Hoc Committee of Pass-Through Certificate Holders (the “Holders”), and Deutsche Bank Trust Company Americas, as indenture trustees (the “Trustee” and, together with the foregoing parties, the “Parties”).

The Parties will settle a series of disputes and potential disputes (such settlement pursuant to the terms herein, the “Settlement”) on various issues regarding the transactions attending the 1999 acquisition of the Somerset and Cayuga generating stations (the “1999 Transaction”) in order to preserve going-concern value, conserve assets of the estates for the benefit of all creditors, and effectuate an efficient transfer of the Somerset and Cayuga facilities and related assets (the “Transferred Assets”) to an entity designated by the Holders (“Newco”), subject to higher and better offers in an auction process.

The several terms of the Settlement shall each constitute necessary elements of a single, fully integrated settlement, and the approval of all of the terms herein shall be a condition of consummating the Settlement and Sale Transaction. If any of the terms herein are not approved by the Bankruptcy Court in the Cases and such approval requirement is not waived by AEE and the Trustee, the Parties shall be restored to the status quo ante as it existed prior to the execution of this Term Sheet, and all of the Parties’ respective rights, claims, interests, arguments, and defenses shall be fully preserved.

The Settlement and any implementing transactions will be effectuated in chapter 11 cases (the “Cases”) to be filed on or about December 30, 2011 (the “Petition Date”) by AEE and related debtors.

<p class="bwcellpmargin"> Solely for purposes of the Settlement, the Parties stipulate that the obligations arising from the 1999 Transaction shall be treated as a secured financing as of the Petition Date, with the Trustee holding and controlling an allowed claim in the amount of $600,000,000, secured by the Adequate Protection Liens (as defined below) and the Trustee’s existing valid and perfected first priority security interests in and liens on the Transferred Facilities and other assets comprising the Indenture Estate (as defined in the documents evidencing the 1999 Transaction) (the “Secured Claim”).

AEE and the Holders shall enter into an asset purchase agreement providing for the acquisition of the Transferred Assets by Newco free and clear of any claims or interests pursuant to section 363(b) and (f) of the Bankruptcy Code. Newco will be a stalking horse bidder with a purchase price equal to the sum of (a) a credit bid of $300,000,000 (which may include the value of any Adequate Protection Liens (as defined below), which the Trustee shall have the right to credit bid); (b) the value of the Assumed Liabilities; (c) cash in the amount of $5,000,000 (the “Cash Payment”), provided, however, that the Cash Payment may be reduced or increased by the Coal/AR Adjustment (defined below); (d) any remaining cash in the Deutsche Bank Depository Accounts as of the closing of the Sale Transaction; and (e) to the extent the transfer date does not occur on or prior to March 30, 2012, additional cash consideration equal to the operating losses, if any, of the Transferred Assets for the period from April 1, 2012 to the transfer date, which shall include AEE overhead at a market rate to be agreed upon by the Parties but not restructuring costs for such period (collectively, the “Purchase Price”). The Cash Payment will be adjusted (the “Coal/AR Adjustment”) by the difference between (i) the value as of the closing of the Sale Transaction of (x) coal either located at the Somerset and Cayuga facilities or paid for by AEE and not yet delivered and (y) accounts receivable related to the operations of AES Eastern Energy, L.P. and (ii) the Minimum Coal/AR Balance (defined below).

The Trustee shall have an allowed general unsecured claim (such claim, the “Residual Claim”) against AES Eastern Energy, L.P. in the amount of $300,000,000, less the amount by which the proceeds realized through a Third Party Sale (defined below) exceed the Purchase Price. In the event that the amount of the credit bid is increased at a later date, the amount of the Residual Claim will be reduced on a dollar-for-dollar basis.

The definitive documents implementing the Sale Transaction shall have representations, warranties, covenants, and conditions customary for sale transactions consummated pursuant to Bankruptcy Code section 363(b) and (f), including, without limitation, a covenant that, until the closing of the Sale Transaction or a Third Party Sale (as defined below), AEE shall operate the Somerset and Cayuga facilities and any related assets in the ordinary course of business, in a manner consistent with past practices, and in accordance with a budget reasonably acceptable to the Trustee, subject to available liquidity and AEE’s fiduciary obligations.

In the event Newco is the not the successful bidder in any sale of any of the Transferred Assets, the entirety of the proceeds of any such sale (a “Third Party Sale”), to the extent the proceeds relate to the Transferred Facilities, shall be applied at closing of such Third Party Sale to repay the Trustee’s claims arising from the 1999 Transaction.

The Settlement and Sale Transaction shall be subject to all necessary approvals of the Bankruptcy Court and any applicable governmental regulatory authorities.

The Parties shall cooperate and use best efforts to effectuate the Settlement and Sale Transaction on the following timeline:

December 30, 2011:

Chapter 11 filing

January 4, 2011:

File motion to approve the Settlement (based on the Term Sheet)

File bidding procedures motion

January 15, 2012:

Commence negotiations with unions

Commence negotiations with NYSEG

January 30, 2012:

Bankruptcy Court approval of motion seeking approval of the Settlement and bid procedures for the Sale Transaction

Filing of all permit applications

Filing of FERC FPA 203 and NYPSC applications

Filing of antitrust notifications, if required

File section 1113 motion, if necessary

File action to sever Interconnection Agreement, if necessary

March 15, 2012:

Bankruptcy Court approval of the Sale Transaction

March 30, 2012:

Closing of Sale Transaction

TRANSFERRED ASSETS¹

AEE shall transfer the following assets to Newco, pursuant to Bankruptcy Code section 363(b) and (f), free and clear of any and all claims, interests, or any liabilities of any kind (including any of the foregoing premised on any theory of successor liability):

• All property that is the subject of and covered by the Somerset and Cayuga Facility Leases (collectively, the “Transferred Facilities”)

• All real property and the Somerset SCR that is the subject of and covered by the Somerset and Cayuga Site Leases

• Ancillary equipment, spare parts, computers, other assets directly relating to operation of the Somerset and Cayuga facilities, subject to a schedule to be agreed upon by the Parties

• Any real property related to the Somerset and Cayuga facilities that is not the subject of or covered by the Leases or Site Leases (if any) (each term as defined in the documents evidencing the 1999 Transaction)

• Coal located at the Somerset and Cayuga facilities, coal paid for by AEE and not yet delivered, and accounts receivable related to the operations of AES Eastern Energy, L.P. and the Somerset and Cayuga facilities, together in an amount not less than $15,000,000 as of the closing of the Sale Transaction (the “Minimum Coal/AR Balance”), in addition all limestone and other raw materials.

• Owned or leased vehicles and heavy equipment used for the Somerset and Cayuga operations, subject to a schedule to be agreed upon by the Parties

• Air emission allowances or credits related to the Cross-State Air Pollution Rule (“CSAPR”), other than Regional Greenhouse Gas Initiative (“RGGI”) credits applicable to the 2009-2011 compliance period, and other environmental allowances and credits, subject to a schedule to be agreed upon by the Parties

• Books and records related to the Transferred Assets (subject to AEE’s continuing right of access)

• All permits, to the extent transferable by law, related to operation of the Somerset and Cayuga facilities (subject to applicable governmental approvals)

• Easements and the Interconnection Agreement related to the Somerset and Cayuga facilities

• Environmental-related deposits related to the Somerset and Cayuga facilities

• All equity interests in SRC²

Newco shall assume the following liabilities:

• Somerset Railroad Credit Facility and Coal Hauling Agreement

• The AEE pension plan

• PILOT agreements in respect of the Somerset and Cayuga facilities

• Asset retirement obligations related to the Somerset and Cayuga facilities

• RGGI and CSAPR emissions liabilities accruing on and after January 1, 2012

• Mechanic’s liens and other encumbrances on the Transferred Assets, in each case, that rank senior to any of the Trustee’s security interests in or liens on such assets, subject to a schedule to be agreed upon by the Parties

• Payment of all AEE employee bonuses for 2011 (due in or about March 2012), to be paid in cash by Newco on the closing date, subject to a schedule to be agreed upon by the Parties

• All AEE severance obligations not authorized for payment under the employee wage motion subject to a schedule to be agreed upon by the Parties

• Environmental obligations at the Somerset and Cayuga facilities, under any agreement with the relevant regulators regarding the treatment of any non-asset retirement obligation liabilities arising from acts and omissions at such facilities that occurred before the Cases

• Others TBD

In the event that the Settlement is approved, all funds in the Deutsche Bank Depositary Accounts (including all sub-accounts) as of the Petition Date shall be deemed and treated as cash collateral and will be available for AEE’s use in accordance with a 13 week cash flow statement reasonably acceptable to the Trustee, subject to a carve out for AEE’s professionals reasonably acceptable to the Trustee. Among other cash collateral rights and forms of adequate protection customarily afforded to secured parties, the Trustee shall be entitled to adequate protection for AEE’s use of and any diminution in value in such cash collateral and the Transferred Assets in the form of replacement liens on and security interests in all of the Transferred Assets in which the Trustee otherwise does not have a first priority security interest or lien in an amount equal to the value of the cash in the Deutsche Bank Depositary Accounts as of the Petition Date (all of the foregoing replacement security interests and liens, the “Adequate Protection Liens”) and reimbursement of the Trustee’s prepetition and postpetition professional fee-related expenses. The Trustee shall be entitled to credit bid the value of such Adequate Protection Liens in connection with the sale of the Transferred Assets.

In the event the Settlement is approved, upon the closing of the sale, any remaining cash in the Deutsche Bank Depository Accounts shall be applied to the Purchase Price and shall no longer be deemed cash collateral.

In the event the Settlement is approved and the Transferred Assets are sold pursuant to the terms hereof, AEE shall waive all rights against the Trustee under section 506(c) of the Bankruptcy Code. In the event the Settlement is not approved, the parties reserve all of their respective rights as to (i) whether the funds in the Deutsche Bank Depository Accounts constitute cash collateral, and (ii) whether such funds can be used in satisfaction or partial satisfaction of section 506(c) of the Bankruptcy Code.

The JPMorgan Rent Reserve Account shall be remain held by JPMorgan for the benefit of the Trustee and subject to the Rent Reserve Payment Undertaking Agreement.

EMPLOYEES³

The consummation of the Settlement and the Sale Transaction is conditioned on (i) the filing of a definitive agreement documenting the Settlement by January 15, 2012; (ii) entry of orders of the Bankruptcy Court approving the Settlement and bid procedures for the Sale Transaction by January 30, 2012; (iii) the entry of an order of the Bankruptcy Court approving the Sale Transaction by March 15, 2012; (iv) the obtainment of applicable regulatory approvals in connection with the Transferred Assets, (v) the obtainment or transfer of all required permits in connection with the Transferred Assets, and (vi) the failure by Newco to deliver to AEE by January 30, 2012 a written notice indicating its dissatisfaction with the environmental condition of the Transferred Assets, unless a reasonable amount of additional time is required to resolve any potentially material issue(s) identified in a Phase I environmental site assessment; provided, however, that the milestones contained herein may be extended upon agreement of the Parties. Confirmation of a plan of reorganization is not a condition precedent to the Settlement or the Sale Transaction, but the Parties will work in good faith toward confirmation of a plan as promptly as possible.