Fitch Rates AES Panama's Proposed $300MM Issuance 'BBB-'; Outlook Stable.

NEW YORK -- Fitch assigns a preliminary rating of 'BBB-' to AES Panama proposed issuance of $300 million in senior unsecured notes. Fitch has also assigned a 'BBB-' foreign and local currency Issuer Default Ratings (IDRs) to AES Panama, S.A. The Rating Outlook is Stable. The notes will have a tenor of 10 years with a bullet amortization. The notes benefit from a six months debt service reserve account. The proceeds of the notes will be mainly used to repay existing debt of the company, $271 million as of Sept. 30, 2006, for financing costs and repayment premiums, and a small portion for general corporate purposes. This new bullet maturity transaction is expected to improve the debt service payments of the company and extend the final maturity, although the bullet amortization will increase refinancing risk at maturity.

AES Panama's ratings are based on its strong portfolio of assets, competitive dispatch position, solid multiple power purchase agreements (PPAs), adequate financial profile, healthy projected debt service coverage under various stress scenarios, and the absence of foreign-exchange risk. The ratings also incorporate potential weaknesses, including exposure to hydrology, commodity price risks, regulatory considerations and potential for long-term competitive price pressures.

AES Panama benefits from a portfolio of existing low-cost hydroelectric generating assets, including dam-based (reservoir) and run of the river units. The company is comprised of four hydroelectric plants with a total installed capacity of approximately 476 MW. The Bayano plant (260MW) operates during the peak load hours yet ahead of the more expensive thermal units. La Estrella (51MW) and Los Valles (45MW) are run of the river facilities and the first units to be dispatched in the system. Esti (120 MW) is dispatched similar to run of the river facilities given the limited size of its reservoir. AES Panama's pool of assets gives the company a very competitive position and somewhat mitigates it's exposure to hydrology risk as the plants are located in different hydrology regions.

The company is well protected against off-taker and electricity spot market risks. Generators in Panama are permitted to enter into PPAs for up to their firm capacity allocation. The regulations promote the use of PPAs by requiring distribution companies to secure 100% of their peak regulated demand for the following year. AES Panama benefits from well-structured PPAs through 2018. The company currently sells electricity under separate PPAs with the country's three distribution companies, Empresa de Distribucion Electrica Metro-Oeste S.A. (Edemet), Elektra Noreste, and Empresa de Distribucion Electrica Chiriqui (Edechi), with various maturities. Panamanian distribution companies appear to have the sufficient credit quality and financial ability to support their respective obligations under the PPAs with AES Panama.

Recently, the company was able to sign a new contract with Edemet and Edechi for 50 MW of capacity at $81.05 per MWh. This new contract is expected to be used to support the development of the new AES Changuinola Hydroelectric project, which will be a separate entity owned by AES Corp. Should the Changuinola project materialize, as currently anticipated, AES Panama's available firm capacity to be contracted will increase by a net of 50 MW, reflecting a 100 MW back-to-back with AES Changuinola. Given that the AES Changuinola project is not expected to come on line until the middle of 2010, AES Panama should have enough time to acquire new contracts starting 2011 in order to mitigate it's exposure to the spot market. Additionally, based on the company's recent success in wining new contracts and given its competitive position, the company appears well positioned to win new contracts.

AES Panama's credit metrics are adequate for the rating category. The company reported a financial leverage, measured as total debt to EBITDA of 2.9 times (x) and 3.7(x) as of year end 2005 and the first nine months of 2006, respectively. Interest coverage for 2005 and September 30, 2006 were 4.1x and 2.9x, respectively. During the past five years, AES Panama's revenue has steadily increased due to installed capacity growth and high electricity spot prices in Panama. EBITDA margins have temporarily increased to approximately 75% in 2005 from an average of 55% during the past five years mainly due to the high spot prices and to the company's successful commercial strategy. Going forward, EBITDA margins are expected to return to historical levels as fuel prices moderate, new capacity comes on line and electricity prices decline.

The company is projected to have healthy debt service coverage under various stress scenarios. Due to the company's adequate contracted position, debt service coverage ratio (DSCR) is expected to remain relatively strong and stable. Under very low hydrology conditions, the most extreme downward, scenario the company is projected to have an EBITDA-to-interest expense ratio of 2.1x.

The ratings of AES Panama are not constrained by the sovereign rating of Panama, as access to foreign exchange--the key determinant of external creditworthiness--is not limited by finite foreign-exchange reserves or controls. Panama's track record of using the U.S. dollar and allowing private-sector debt repayment during periods of sovereign default allows entities in Panama to be rated above the 'BB+' sovereign rating and up to a country ceiling of 'BBB', based on the underlying corporate credit rating of the entity.

AES Panama is hydroelectric generation company located in the Republic of Panama. Privatized in 1998, the company is owned by AES Panama Energy 49%, the Government of Panama (GOP) 50.5% and employees 0.5%. Government ownership is not viewed as a constraint as AES Panama Energy has complete operational and managerial control of the assets under Articles of Incorporation and Administration Contracts and appoints three of the company's five directors.

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