Release: S&P affirms Paiton B- rating; off CreditWatch

SINGAPORE (Standard & Poor's) Oct. 29, 2004--Standard & Poor's Ratings Services today affirmed its 'B-' rating on the US$180 million senior secured bonds issued by Paiton Energy Funding B.V., and guaranteed by PT Paiton Energy (Paiton). At the same time, the bond rating was removed from CreditWatch with negative implications, where it was placed on June 17, 2004. The outlook is stable.

The rating action follows Standard & Poor's assessment that Paiton's decision to construct a new generating facility in Indonesia should not materially affect the company's credit profile.

Paiton announced in June 2004 that it was negotiating with PLN to construct a new 800 megawatt power unit at the Paiton complex, which is estimated to have a construction cost of US$580 million. The construction is still subject to various conditions, including the signing of appropriate contractual agreements with PLN to determine the electricity tariff, agreements with the government of Indonesia on several matters such as letter of support, and approvals from lenders and shareholders.

If Paiton proceeds with the new project, Standard & Poor's believes that its exposure to the construction risk will not have a significant impact on the company's credit quality. Given the sponsors' experience in constructing power plants globally, some level of comfort can be taken that the sponsors will sign engineering, procurement, and construction (EPC) contracts with reputable contractors and one that will pass the majority of risk through to the contractors. In addition, the use of a proven technology for the new unit should reduce the complexity in construction.

Post construction, Standard & Poor's expects Paiton's debt service coverage to remain adequate. Additional debt servicing requirement expected from the new project is likely to be offset by the lower outstanding debt from the existing project. By 2009, the earliest foreseeable period for the operation of the new plant, the outstanding senior debt from the existing project would have decreased substantially to US$872 million from US$1.6 billion in 2004. In forecasting Paiton's future cash flow, Standard & Poor's assumed that the tariff for the new project will not be significantly lower than the currently proposed tariff of approximately US$4.50 cents per kWh.

Paiton is a limited-liability Indonesian company established to construct, own, and operate a 1,230 MW coal-fired plant in East Java, Indonesia. The company is currently undergoing a change in ownership, as its largest shareholder, Edison Mission Energy (B/Watch Positive/--) has agreed to sell its shares in Paiton to a consortium comprising of International Power PLC (BB/Watch Negative) and Mitsui & Co., Ltd. (BBB+/Positive/A-2). The sale in shares by Edison Mission is expected to be completed in December 2004.

Standard & Poor's views the proposed change in ownership to be a credit neutral event. Under the new owner, the management at Paiton is expected to remain in place.

In addition, International Power's experience in operating various coal-fired plants should support Paiton's operations, as it plans to replace Edison Mission as the O&M contractor. International Power intends to retain most of the staff involved in operating and maintaining the existing power units. International Power will also provide O&M performance guarantee to Paiton. (end of release)

Primary Credit Analyst(s): Erly Witoyo, Singapore (65) 6239-6321; erly_witoyo@standardandpoors.com Secondary Credit Analyst(s): Sharad Jain, Singapore (65) 6239-6340; sharad_jain@standardandpoors.com