Fitch Upgrades AES IHB's Certificates to 'B+'; AES Tiete to 'A(bra)'.

CHICAGO & RIO DE JANEIRO, Brazil -- Fitch Ratings has upgraded the rating on USD$300 million of 11.5% trust certificates issued by AES IHB Cayman, Ltd. (IHB) to 'B+' from 'B'. Concurrently, Fitch has upgraded the national scale rating of AES Tiete S.A. (Tiete) to 'A(bra)' from 'BBB+(bra)'. The Rating Outlook for AES Tiete is Stable.

The rating action reflects the recent upgrade of Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A.'s (Eletropaulo) local and foreign currency issuer default rating to 'BB-' from 'B+' and of its national scale rating to 'A(bra)' from 'BBB+(bra)'. Eletropaulo is Tiete's sole contractual offtaker under a long-term power purchase agreement (PPA) that expires in 2015.

Tiete's financial profile remains strong for the rating category and is linked to Eletropaulo's ability to meet its contractual obligations. Tiete's strong credit profile is characterized by healthy EBITDA margins, low leverage, solid interest expenses coverage and predictable cash generation due to its contractual energy sales and low operating cost structure. The rating is constrained by Eletropaulo's credit profile, its aggressive dividend policy and its potential capacity expansions. While regulatory risk remains an ongoing credit concern, the approval in 2004 of a new electric energy industry model adds increased certainty to the sector.

The company has a conservative capital structure and solid credit metrics. The company reported a financial leverage as measured by total debt-to-EBITDA ratio of 1.4 times (x) (0.6x on a net debt basis) as of June 30, 2006 (LTM), with cash and cash equivalents of BRL777 million and total debt of BRL1.4 billion. The company reported net revenues of BRL698 million and EBITDA of BRL543 million as of six months ended June 30, 2006, which represent a 30% and 27% increase, respectively, compared with the same period in 2005. This is mainly due to the replacement of the initial lower priced contracts with the contracts with Eletropaulo as well as adjustments in the tariffs.

Tiete remains exposed to financial risks associated with capacity expansion projects required by its concession contract. The company is obligated to expand its generating capacity by approximately 400 megawatts (MW) by December 2007. This additional capacity must be in the State of Sao Paulo, where development of hydroelectric plants is difficult due to limited availability of hydro resources and a difficult permitting process; no environmental licenses have been issued for the construction of thermoelectric plants to date. Tiete has been negotiating with the sector regulator and the government of the State of Sao Paulo for a resolve the matter. All affected parties are aware of the situation and working toward an agreement.

IHB certificates' rating is based on Tiete's underlying credit strength and its ability to distribute dividends to meet IHB's debt payments. IHB certificate holders are structurally subordinated BRL1.4 billion of debt owed to Eletrobras, which is at the operating company level. The increases in Tiete's net income and operational cash generation have translated into bigger dividends, BRL539.0 million being paid relative to 2005 and BRL305.5 million for the first half of 2006. A portion of Tiete's dividend payments was used to pay IHB's debt service. The certificates are guaranteed by AES Tiete Empreendimentos S.A. (TE), the controlling shareholder, by AES Tiete Participacoes S.A. (TP) and AES Tiete Holdings, LTD., Tiete's holding companies, and the shares of these companies are pledged as collateral.

Tiete is a hydroelectric energy generation company in the State of Sao Paulo, Brazil, with an installed capacity of 2,651 MW. The company is directly owned by AES Tiete Empreendimentos S.A. and AES Tiete Participacoes S.A., subsidiaries of Brasiliana Energia S.A.. TE and TP own 71.3% of the voting shares of Tiete, representing approximately 43.9% of the company's total capital stock. While TE and TP have effective control, they receive only 42.5% of dividends and distributions from Tiete, which provides the cash flow to service the certificates. TE and TP forward funds to IHB in form of intercompany loan debt payment in order for IHB to meet its debt-service obligations.

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