Fitch Ratings Comments on Downgrade of AES Tiete Certificates

Business Wire, June 25, 2002

Business Editors

Fitch Ratings earlier announced the rating downgrade of the AES Tiete Certificates Grantor Trust to 'BB ' in conjunction with the ratings downgrade of many Brazilian corporates, including that of Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A.'s (Eletropaulo). The Brazilian corporates were downgraded following the lowering of the country's sovereign rating to 'B '. Eletropaulo was downgraded to 'BB ' with a Negative Rating Outlook. The downgrade of the Certificates was in part related to the downgrade of Eletropaulo as well as the lack of an electricity trading market, in combination with the sovereign rating action. As the sovereign credit environment deteriorates, risks of government meddling into the sector holds the potential to increase.

Eletropaulo's credit rating has been under pressure as a result of impending refinancing concerns, which have been exacerbated by the continuing poor market conditions. The downgrade of the sovereign implies a higher credit risk for corporates operating in Brazil and reliant on local regulations such as Eletropaulo. Similarly, the rating of the Certificates is based on the credit quality of Tiete, which is derived from the credit quality of its offtakers, the largest and most important of which is Eletropaulo. As a result, the downgrade of Eletropaulo directly affects the rating of the Certificates. Additionally, the rating of the Certificates is based on the dividend flow from Tiete to its holding companies, and therefore considers the structural subordination of those dividends to the liabilities at the operating company level, which further limits the degree of separation of rating notches between the Certificates and Eletropaulo.

The rating of the Certificates considered that Tiete's contractual power sale arrangement with Eletropaulo provided a floor amount of secure, investment grade quality revenues, offsetting to some extent that the other distributions companies to which Tiete sells are less credit worthy. Under a new, separate contract Eletropaulo will increase its purchases to 100% of Tiete's Assured Energy production by 2006 as the Initial Contracts are phased out beginning in 2003. Fitch had also previously expected that Tiete would benefit from secondary revenue potential, in addition to contractual sales, from energy sales in the MAE (spot market). And that in the event Tiete were to lose the Eletropaulo contract and operate on a merchant basis, Tiete would maintain sufficient earnings and cash flow to pay dividends and service holding company debt (i.e., the Certificates). This was based on the assumption that Tiete could sell more energy at projected higher market prices, and offset the increased market and business risk s of selling to the spot market.

Unfortunately, the MAE has not been functioning since the beginning of the electricity rationing in June 2001, which has materially financially pressured those generation plants that were developed to operate as merchant facilities. As a result, Tiete can not currently rely on its ability to sell into the spot market in the event Eletropaulo is unable or unwilling to make payment. The downgrade of Eletropaulo implies that the risks associated with payment to suppliers has increased; however, under the terms of the initial contracts the generation companies have the capability to recover payment directly from a distributor's receivables bank account. This has not been tested.

The rating will be monitored and revised as necessary to reflect the Eletropaulo rating, evolution of the MAE and other sovereign credit developments. Additional developments one or more of these issues will be considered in any future rating change of the Certificates.

The certificates continue to benefit from a 6-month debt service reserve account. Fitch anticipates that the company's cash balance, future contract-based revenues, the end of rationing in March 2002 should allow the company to meet future debt service through dividend payments.

Tiete is a low-cost electric generating company that benefits from a portfolio of hydroelectric assets and a base of contracted revenues. Tiete is centrally dispatched by the independent system operator to optimize system operation. Strong projected revenue growth, stable operating costs, manageable hydrology and regulatory risks, limited refinancing needs and experienced ownership support Tiete's credit quality. For a copy of the AES Tiete Certificates downgrade announcement please see press release from June 25, 2002 'Fitch Takes Rating Action on Brazilian Corporates & Structured Transactions'.