Fitch Assigns 'BBB-' to AES El Salvador's Proposed US$290MM Issuance.

CHICAGO -- Fitch Ratings has assigned a 'BBB-' rating to AES El Salvador Trust's proposed 10 year, US$290 million Political Risk Protected (PRP) bond issuance. Fitch has also assigned a 'BBB-' local currency rating and 'BB+' foreign currency rating to AES El Salvador, S.A. de C.V. (AES El Salvador) reflecting the combined credit quality of AES El Salvador's four operating companies, Compania de Alumbrado Electrico de San Salvador S.A. de C.V. (CAESS), AES CLESA y Compania, S. en C. de C.V. (CLESA), Empresa Electrica de Oriente, S.A. de C.V. (EEO) and Distribuidora Electrica de Usulutan, S.A. de C.V. (DEUSEM). The proceeds of the issuance by the trust will be used to repay existing debt at CAESS, CLESA and EEO. After repayment of the existing debt, remaining proceeds are expected to be used to pay dividends to the shareholders of CAESS and CLESA, and for general corporate purposes. The payment of principal and interest on the new notes will be fully and unconditionally guaranteed on a senior unsecured, joint and several basis by CAESS, CLESA, EEO and DEUSEM.

The local currency and issue ratings are based on the combined credit strength of its operating assets and reflect the group's relatively large size compared to the market, low business risk profile, its geographical diversification, its operating efficiency, and its adequate financial profile. The rating also reflects the nonexclusive nature of the service territories and the electricity sector's exposure to potential social, political and regulatory changes. The ratings of AES El Salvador also incorporate the economic, political and other sovereign risks inherent in investments in El Salvador. Fitch currently rates the sovereign at 'BB+' with a Stable Rating Outlook.

The notes are rated above the 'BB+' foreign currency rating of the company and country because they benefit from external liquidity facilities totaling 12 months of interest payments. A six month debt service reserve account coupled with a six month letter of credit (LOC) provided by Credit Suisse (CS, acting through its Cayman Islands branch) help protect against a potential currency inconvertibility/non transfer event and allow for the rating of the notes to breach the sovereign ceiling. The facilities will remain available for the life of the notes as long as certain criteria are met. While the stated maturity of the notes is 2016, the notes can be extended by 12 months during an event of transfer and convertibility restrictions.

AES El Salvador's credit rating is based on the underlying credit quality of the four operating assets. AES El Salvador is the largest electric distributor utility group in El Salvador with a market share of 78.2% reaching a total of approximately one million customers. The group is somewhat geographically diversified as it covers more than three quarters of the country but remains entirely exposed to Salvadoran sovereign risk. During 2004, AES Corp. integrated into AES El Salvador several administrative and operational functions of its Salvadoran distribution companies to improve customer service, increase operational efficiency and to strengthen purchasing and market power. The administrative changes illustrate how closely aligned and operated these assets are despite being legally separate entities.

The Salvadoran electricity distribution companies are, for practical purposes, operated as natural monopolies and are stable, low-risk businesses. However, distribution service territories are not exclusive, and distributors are free to compete for customers under the rules established by the Electricity Law. The risk of new competition is minimal given that distribution companies possess significant economies of scale that make it inefficient and impractical for more than one company to operate in a particular geographic area. Any switching of suppliers should not materially affect the company's cash flow, as distribution tariffs would continue to be collected if the distribution grid is used. Management's strategy is to continue focusing on improving quality of service standards and lowering costs to further strengthen the company's business position and maintain its relationships with customers.

AES El Salvador's operations are relatively efficient. The group, on a consolidated basis, has been able to reduce energy losses to 8.8% for the third quarter of 2005 from approximately 10% at the beginning of 2004, compared with the regulated allowance for energy losses of 7.9% and 8.7% for urban and rural areas, respectively. However, the energy loss formula is applied individually to each company and cannot be compensated by lower energy losses of another company. CAESS losses are lower primarily due to its higher density service territory. Losses at CLESA, EEO and DEUSEM are higher, but generally are reasonable for non-urban electric distributors in Latin America. Based on AES's technical expertise and its proven ability to reduce energy losses, further modest improvements to the companies' efficiency measures over the coming years should benefit margins and earnings.

The Salvadoran regulatory framework, like those in many other emerging markets, is vulnerable to social and political interference, but has generally been constructive for distribution companies. Distribution tariffs are reset every five years, based on expected cost structure and capital expenditures of the distribution company. Semi-annual tariff adjustments are made to reflect changes in the cost of energy, and annually to reflect changes in inflation or more frequently if quarterly movements in the CPI exceed 10%. Energy prices are designed to be a pass-through based on the spot market albeit with a six month lag. However, in December 2005, the tariff adjustment resulted in an increase of 0.5% versus the approximate 5.0% calculated by the tariff adjustment formula to reflect higher spot prices during the previous semester. The lower than expected adjustment seems to be somewhat political as it comes in advance of the March 2006 congressional, mayoral and municipality elections.

The difference between the relatively higher spot price and the final tariff to customers has resulted in a deficit of a compensatory fund, which was created by the government in 2003 to track fluctuations in energy prices and to lower the volatility for end users. This deficit is expected to be financed by the government through its energy generation company Comision Ejecutiva Hidroelectrica del Rio Lempa (CEL) by giving the distribution companies credit notes to be used for future energy purchases. The lower than expected tariff adjustment should not materially affect the credit quality of AES El Salvador's distribution companies.

AES El Salvador's financial profile is adequate for the rating category. The group, on a combined basis, has a stable cash flow generation with an average EBITDA margin of 21% for the past five years. AES El Salvador presented strong interest coverage, measured as EBITDA-to-interest expense of 3.8 times (x) and 3.5x for year-end 2004 and through the third quarter 2005, respectively. Leverage has been stable and modest. Through the third quarter of 2005 the group had a total debt-to-EBITDA ratio of 2.9x. The proposed transaction is expected to temporarily increase the leverage of the company with debt-to-EBITDA increasing to an estimated 3.5x at year-end 2006. AES El Salvador's post-transaction financial profile and expected improvements are consistent with the assigned rating category. Once the refinancing is completed, AES El Salvador should have an improved financial profile compared to the existing debt structure at the individual operating companies, characterized by an extended debt maturity and lower annual debt service, reflecting the bullet amortization of the proposed issuance. Further, the joint and several guarantees of the operating companies provide broader cash flow availability to meet debt obligations.

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