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Announcement:

Moody's affirms Baa3 rating at Salton Sea; outlook stable

06 Dec 2012

Approximately $101.1 million (originally $295 million) of debt securities outstanding

New York, December 06, 2012 -- Moody's Investors Service has affirmed the Baa3 rating on Salton Sea Funding Corporation's (Salton Sea) senior secured bonds due November 2018. The rating outlook for Salton Sea remains stable.

RATINGS RATIONALE

The rating affirmation and stable outlook take into consideration the challenging operating conditions Salton Sea has encountered in 2012, but incorporate a view that the 2012 events are one-time in nature and prospective operating and financial results will be in line with historical performance. The rating affirmation and stable outlook consider the existence of a sponsor provided one-year debt service reserve, which greatly reduces the potential for rating volatility. Moreover, the rating affirmation takes into account our assessment of the sponsors' individual financial strength and more importantly, their demonstrated willingness to support the project.

Operating revenue through the first nine months of 2012 was $37.1 million lower than the same period in the prior year, due to lower energy production and lower energy rates tied to Southern California Edison's (SCE; A3, stable) short-run avoided cost (SRAC) at eight of Salton Sea's plants that account for 235 MW of generating capacity, which equates to approximately 72% of total generating capacity.

Through prior amendments to the respective power purchase agreements (PPA) with SCE, Salton Sea was able to fix the energy rate for SRAC-exposed plants to 6.16 cents per kWh, escalated at 1% annually from May 2008 through May 2012. The amendments have since expired and the affected plants have been earning SRAC energy prices, which averaged 2.8 cents per kWh through the first nine months of 2012. Recognizing the risk posed by lower energy prices tied to SRAC, the project sponsors implemented a hedging strategy to set a natural gas price floor for approximately 80% of anticipated generation from the SRAC-exposed plants in 2012, 65% of anticipated generation from the SRAC-exposed plants in 2013 and 40% of anticipated generation from the SRAC-exposed plants in 2014. The hedges will mitigate the full impact of lower energy rates tied to SRAC for the affected plants.

In addition to lower energy rates, Salton Sea has faced certain operating challenges this year that Moody's does not anticipate will resurface in subsequent periods. The operating challenges resulted in lower generation and increased major maintenance costs over the first nine months of 2012 compared to 2011. Salton Sea's overall capacity factor measured 83.5% through September 2012 compared with 89.9% in the prior year. The operating issues this year have been related to unscheduled outages caused by generator failures and reduced brine flow conditions at certain Salton Sea projects. Additionally, SCE curtailed 80 MW of generating capacity from the Salton Sea projects as it completed a 30-day transmission line outage, which will reduce total operating revenue by approximately $2.5 million. Management has utilized the 30-day idle period for the impacted plants to bring forward maintenance that had been planned in 2013, causing 2012 operating expenses to rise, but substantially lowering 2013 and 2014 operating expenses, which should aid future financial performance.

Overall, the cumulative impact of the above factors should cause Salton Sea's full-year 2012 debt service coverage ratio to fall between 1.2 -- 1.3 times, which is well below the project's performance from prior years. Moody's anticipates that Salton Sea's operating performance will return to the level of prior years, particularly as management invests in robust capital expenditure and major maintenance programs to keep availability and production as high as possible. Over the next three years, management anticipates investing over $30 million per year, on average, in capital expenditure programs that include additional well drilling, pipeline enhancements and production equipment improvements.

Finally, Salton Sea rating and stable outlook further benefit from the strong stewardship provided by CE Gen's co-owners, MidAmerican Energy Holdings Company and by TransAlta USA Inc. In addition to the co-owners providing liquidity support for the project through one year debt service letters of credit, both have demonstrated a willingness to support the project in the past, and we believe will likely do so as required over the term of the debt. As discussed above, we observe the substantial degree of capital being invested in this geothermal resource as a further indication of the sponsor's long-term view around supporting this investment.

The principal methodology used in this rating was Power Generation Projects published in December 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Salton Sea Funding Corporation is a wholly-owned subsidiary of CE Generation LLC (CE Gen; senior secured rated Ba2, stable outlook), which in turn, is jointly-owned by MidAmerican Energy Holdings Company (50%) and TransAlta USA Inc. (50%). Salton Sea is the funding vehicle for ten California-based geothermal projects representing an aggregate net ownership interest of 327MW of electrical generating capacity. Eight of the ten geothermal projects have long-term PPAs with SCE the majority of which matures after the final November maturity of the bonds. The remaining two plants are also fully contracted with other utilities.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Richard E. Donner
VP - Senior Credit Officer
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Chee Mee Hu
MD - Project Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Baa3 rating at Salton Sea; outlook stable
No Related Data.
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