Paiton's $180 bond on credit watch negative: S&P

Rating firm Standard & Poor's Ratings Services (S&P) on Friday placed its 'B-' rating on the US$180 million senior secured bond due 2014 issued by Paiton Energy Funding B.V. on CreditWatch with negative implications.

The bond is guaranteed by PT Paiton Energy (Paiton).

The rating action follows Paiton's announcement that it is pursuing negotiations with PLN to expand its electricity generating capacity through the construction of a new 800 megawatt (MW) power unit at the Paiton complex, which is estimated to cost US$580 million.

Paiton signed a memorandum of understanding with PT PLN (Persero) to explore the development of this expansion in connection with the 2002 restructuring of its power purchase agreement.

"If Paiton proceeds with the expansion, its credit profile could weaken, as the company might be exposed to construction risk and a higher debt burden depending on the contractual structure. In addition, the proposed

sharing of coal and ash-handling facilities of the two projects could affect the operational factors for the existing project," said S&P's credit analyst Erly Witoyo.

S&P said that the expansion is subject to various conditions, including the signing of appropriate conntractual agreements with PLN to determine the electricity tariff, agreements with the Government of Indonesia on several matters such as continued support, and approvals from lenders and shareholders.

A rating is normally placed on CreditWatch when an event or deviation from an expected trend has occurred or is expected, and additional information is necessary to take a rating action. A CreditWatch listing with negative implication does not mean a rating downgrade is inevitable. It indicates that the rating may be affirmed or lowered.

Standard & Poor's will announce the final rating after a detailed assessment of the new project and its financing arrangements, following discussion with management. "Should the company not proceed with the

expansion or if the expansion does not significantly weaken the credit quality of the company, then the rating is likely to be affirmed," said Witoyo.

According to S&P Paiton's credit profile reflects the weak financial profile of its offtaker, PLN, and Paiton's operations in Indonesia, which has been facing economic and political uncertainties over the past few years. Partly offsetting this is Paiton's strong contractual agreement with PLN, which provides a stable cash flow, and the expected robust electricity demand in Indonesia over the medium term.

Paiton is a limited liability Indonesian company established to construct, own, and operate a 1,230 MW coal-fired plant in East Java. The company is owned indirectly by Edison Mission Energy with a 45% share, Mitsui & Co., Ltd. with a 36% share, General Electric Capital Corp. with a 14% share, and directly by PT Batu Hitam Perkasa with a 5% share.(alex)