Fitch Rates Itabo's Proposed US$125MM Notes Issuance 'B-'

Business Wire, Sept 25, 2006

CHICAGO -- Fitch Ratings has assigned a 'B-' international foreign and local currency Issuer Default Rating (IDR) to Empresa Generadora de Electricidad Itabo, S.A. (Itabo). Fitch has also assigned a 'B-' to the proposed issuance of US$125 million notes to be issued by Itabo Finance S.A. The new notes have also been assigned a recovery rating of 'RR4'. The proceeds from the proposed issuance are expected to be used to refinance existing debt, for general corporate purposes and to pay dividends. Fitch rates Itabo 'BBB(dom)' on the national scale. The Rating Outlook for all ratings is Positive.

Itabo's ratings incorporate the risks of operating electric generation assets in the Dominican Republic (DR), its strong competitive position as the lowest cost thermoelectric generator in the country, as well as its solid financial profile and experienced management team. Itabo operates two low-cost, carbon-fueled electric generation units and sells electricity to three distribution companies through well-structured, long-term U.S-dollar-denominated purchase power agreements (PPAs).

While multiple offtakers diversify its revenue stream, and long-dated PPAs mitigate price and volume risks, Itabo could face collection risks from the electric distribution companies, which are still in the process of improving their own losses and collection rates. Although low collection rates led distribution companies to defer their payments to generation companies, Itabo's collection rates have been improving mainly due to the government support to the sector. The current Dominican government is supporting the power sector by providing subsidies to the distribution companies to cover their energy costs. This committed financial support, along with distribution companies' initiatives to reduce losses, are helping to stabilize the system.

The new debt issuance is expected to increase leverage, although credit protection measures are expected to remain solid for the rating category. Following the issuance, EBITDA-to-interest expense is expected to be between 3.0 times (x) and 3.5x, total debt-to-EBITDA is expected to be between 2.5x and 3.0x, and net debt-to-EBITDA between 1.0x and 2.0x. High initial cash balances as well as a six-month debt service reserve provide substantial liquidity, although potential increases in dividends could erode cash balances and liquidity over time. Although long-term refinancing risk remains a concern given the recent volatility of the Dominican economy and energy sector, short- and medium-term refinancing risks are mitigated by the long tenure of the new notes. The company's credit metrics are considered strong for the rating category with relatively low leverage and healthy interest coverage compared to other generation companies in the region.

Itabo's fuel mix of coal and pet coke as well as its baseload operating characteristics provide it with competitive advantages versus other thermoelectric generators in the country. Itabo is a low-cost thermoelectric generator, which is usually the first unit to be dispatched in the system after the hydroelectric plants. Should new hydroelectric or other cost-efficient generation units come on-line, Itabo's competitive advantage is expected to be only marginally affected, and to still be dispatched as a baseload unit. Itabo's well-structured PPAs also mitigate competitive risk. Recently, the Dominican government announced the construction of two new coal-fired generation plants. These new plants are expected to come on-line in three to five years and to add an approximate 1,200 megawatts (MW) of installed capacity to the country. The final construction of these units remains uncertain.

The company has an experienced management team with an average of 20 years of experience working in the energy industry in different countries. Itabo is managed by affiliate New Caribbean Investments, S.A. (NCI), another AES Corp affiliate in the DR, under a management contract. Itabo also benefits from the operational experience of its parent AES Corp, a leading global power company with revenues of US$11.1 billion during 2005. AES Corp. operates in 26 countries, generating 44,000 MW of electricity through 127 power facilities and delivering electricity through 14 distribution companies. Itabo takes advantage of AES Corp.'s broad corporate network by transferring employees from other parts of the AES group in order to benefit from their experience and to train local staff.

The DR electricity sector remains highly dependent on government support and subsidies. The administration has recognized the importance of solving the challenges facing the power sector and, at the end of 2004, announced a strategy for this sector to reach financial sustainability which was also included in the country's agreement with the International Monetary Fund (IMF). Key initiatives to support the sector include improving the cash recovery of distribution companies by reducing energy losses and improving collections, increasing the average revenue of distribution companies through tariff adjustments, and improving the regulatory framework.