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Rating Action:

MOODY'S CONFIRMS RATINGS OF CE GENERATION LLC AND SALTON SEA FUNDING CORPORATION AT Ba1 (Sr. Sec.); RATING OUTLOOK IS STABLE

28 May 2004
MOODY'S CONFIRMS RATINGS OF CE GENERATION LLC AND SALTON SEA FUNDING CORPORATION AT Ba1 (Sr. Sec.); RATING OUTLOOK IS STABLE

Approximately $665 Million of Debt Securities Affected

New York, May 28, 2004 -- Moody's Investors Service confirmed the senior secured bonds of CE Generation, LLC (CE Gen) at Ba1. Moody's also confirmed the senior secured bonds of CE Gen's subsidiary Salton Sea Funding Corporation (Salton Sea) at Ba1. This action concludes the review of these ratings for possible upgrade. The rating outlook is stable for both CE Gen and Salton Sea.

The ratings had been placed under review due to the improving credit quality of Southern California Edison Company (SCE: Baa2 sr. sec., under review for possible upgrade) and reflected the fact that a majority of Salton Sea's cash flows, and a substantial portion of CE Gen's cash flows, are derived from long-term contracts with SCE. Salton Sea is a wholly-owned subsidiary of CE Gen and is a funding vehicle for ten California-based geothermal projects representing an aggregate net ownership interest of 327 MW of electrical generating capacity. Eight of the ten geothermal projects are under contract with SCE. CE Gen has an aggregate net ownership interest of 769 MW of electrical generating capacity, consisting of the ten Salton Sea projects and three natural gas-fired facilities located in New York, Texas, and Arizona.

The confirmation of the ratings reflects a balance between the favorable impact of the offtaker's improving credit quality and the projects' weaker than expected operating and financial performance. The debt service coverage ratios for CE Gen and Salton Sea have fallen below the base case levels as outlined in the Offering Circulars for both projects, and Moody's anticipates that this trend will continue for the next several years. The performance shortfall is due in part to higher than expected operating and maintenance costs associated with the costs of geothermal gathering systems and the disposal costs associated with brine and solids management. In addition, operating performance was impacted by decreased production and capacity levels due to turbine failures at three of the geothermal plants.

The rating action also considers that revenues will be exposed to the uncertainty of variable energy payments equal to SCE's avoided energy cost once fixed energy payments end in 2007, potentially reducing cash flow available for debt service should those energy payments fall below current levels. Capacity payments will continue to be fixed, based on the rates established in the power purchase agreements with SCE. The energy pricing risk, however, in combination with the higher maintenance costs, reduces the margin for error under stress scenarios.

The stable outlook for the projects reflects the contractual nature of the cash flows, and incorporates the expectation that the credit quality of Southern California Edison will be maintained or improved from its current level. For Salton Sea, the outlook also considers the strategic location of Salton Sea's geothermal power projects, located in Southern California's Imperial Valley, and their significance as a renewable resource in a state that has an acceptance and demand for "green" power. California has a statute requiring that at least 20% of an investor owned utility's annual electric sales be procured from renewable resources by 2017. The current forecasted debt service ratio coverages for Salton Sea, while still expected to be below original forecasts, show improvement to the 1.7x-2.0x range in a few years time. Potential exists for an upgrade if these higher coverages could be realized, which Moody's believes would require an improvement in the operating performance of the plants and establishment of energy payments from SCE that are not radically different from the current level after the expiry of the fixed rate arrangement in May 2007.

The rating of CE Gen considers the higher debt service coverage and the portfolio effect of greater geographic and fuel source diversification that results from its ownership of the three projects located in New York, Texas, and Arizona; and the low leverage of these projects. This is offset against the substantial negative effect of structural subordination to project level debt below CE Gen, primarily the debt at Salton Sea. Due to projected rising cash flow from Salton Sea, while cash flow from CE Gen's other projects is expected to decline, structural subordination to the debt at Salton Sea becomes more important over time. This trend is particularly marked after 2009 when a major contract expires at another CE Gen project subsidiary. As a result, CE Gen's rating is capped by the rating of Salton Sea, and a notch between the ratings could be established at some future date if events transpire as is currently projected.

CE Gen is jointly-owned by MidAmerican Energy Holdings Company (50%) and by TransAlta USA Inc. (50%). Salton Sea Funding is a special purpose corporation that is wholly-owned by CE Gen.

New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Richard E. Donner
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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