New York, December 06, 2012 -- Moody's Investors Service has downgraded the rating on CE Generation LLC's (CE Gen) senior secured bonds to Ba2 from Ba1 The rating outlook is stable.

RATINGS RATIONALE

The downgrade reflects CE Gen's inability to pay its debt service in 2012 from subsidiary project distributions alone, owing primarily to a cash trap that exists at subsidiary, Salton Sea Funding Corporation (Salton Sea; Baa3, stable)and will therefore utilize cash on hand, along with other internal sources, to cover debt service on its obligations. CE Gen had $28.4 million in consolidated unrestricted cash at the end of September 2012 (of which $2 million resided at Salton Sea) and $23 million of consolidated restricted cash in the revenue fund (of which $12 million resided at Salton Sea). We understand that CE Gen will not draw on its $19.5 million sponsor provided debt service reserve letters of credit. The rating action further recognizes the restricted payments test of 1.5x that exist at Salton Sea, which is a somewhat higher standard than other projects and argues for wider notching between the rating of CE Gen and Salton Sea. To that end, the rating action incorporates an expectation for CE Gen's debt service coverage ratio to remain under pressure over the next two years, especially if distributions from Salton Sea do not materialize as projected.

Moody's calculates that at least 75% of the expected dividends available for debt service at CE Gen is expected to come from subsidiary Salton Sea. While the CE Gen portfolio has a modest amount of asset and cash flow diversification from the Saranac, Yuma and Power Resources plants, all of which are debt free, the Salton Sea subsidiary is the primary cash flow generator and its distributions will drive CE Gen's financial performance. Going forward, we calculate that the Saranac, Yuma and Power Resources facilities are anticipated to distribute a combined $10-$12 million annually to CE Gen in each of the next several years. Aside from 2012, Salton Sea has historically contributed $30-$50 million to its parent, and we would expect similar performance from Salton Sea over the remaining term of the debt which matures in 2018. In 2012, the distribution will only amount to $7 million resulting in CE Gen having to use unrestricted cash on hand and other resources to fully cover its debt service obligations in 2012.

During 2012, Salton Sea's financial and operating performance has been impacted by a number of factors. As of May 2012, 72% of the project's generating capacity reverted back to Southern California Edison's (SCE A3 stable) short-run avoided cost (SRAC) energy price. The current natural gas price environment has pushed SRAC energy prices to a level substantially below the 6.16 cents per kWh energy rate that prevailed between May 2008 and May 2012 for the impacted plants. 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; however, operating revenue at Salton Sea through the first nine months of 2012 is still $37.1 million lower than the same period in the prior year. In addition to lower energy rates, Salton Sea has faced certain operating challenges this year that Moody's does not anticipate to be recurring, including SCE related line outages and certain unscheduled outages related to equipment issues. All of these factors have contributed to Salton Sea's underperformance in 2012, and resulted in the minimal distribution to CE Gen.

Over the next three years, Salton Sea anticipates investing over $30 million per year in capital expenditure programs that include additional well drilling, pipeline enhancements and production equipment improvements. The capital expenditure program is in addition to the project's standard major maintenance program. While Moody's anticipates that Salton Sea's operational and financial performance will rebound in 2013, any cost increase in the capital expenditure and major maintenance programs or further operating issues can impact distributions to CE Gen.

Finally, Salton Sea and CE Gen's 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 debt service letters of credit, both have demonstrated a willingness to support the projects in the past, and we believe they 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 Salton Sea, a renewable resource, as a further indication of the sponsor's long-term view around support for 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.

CE Generation LLC is jointly-owned by MidAmerican Energy Holdings Company (50%) and by TransAlta USA Inc. (50%). CE Gen consists of ten California-based geothermal projects (Salton Sea) with a generating capacity of 327 megawatts of which eight have long-term contracts for electric output with SCE, and the remaining two plants are also fully contracted with other utilities. CE Generation also owns three gas-fired projects located in New York, Arizona, and Texas, which when combined with its geothermal capacity totals an aggregate net ownership interest of 829MW of electrical generating capacity.

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Richard E. Donner VP - Senior Credit Officer Project Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Chee 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 StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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