Fitch Upgrades CE Generation, LLC to 'BB+'.

CHICAGO -- Fitch Ratings has upgraded to 'BB+' from 'BB' the rating of CE Generation LLC's $400 million secured bonds due 2018 as a result of the extension of the fixed-price period for short-run-avoided-cost (SRAC) with Southern California Edison (SCE), the purchaser of a significant portion of CE Generation's output. The extension of the fixed-price period through 2012 greatly stabilizes cash flows during the period.

CE Generation is a portfolio of ownership interests in ten geothermal and three natural gas fired generation facilities. The ten geothermal facilities (Salton Sea) are separately encumbered with project-level debt, as is one natural gas fired facility (Saranac). The two remaining facilities are unencumbered at the project level. CE Generation also receives fees for providing operating services to the Saranac facility. The project-level debt is structurally senior to the CE Generation debt.

SRAC is a regulatory energy price typically indexed to the prevailing natural gas price. On May 30, 2006, Salton Sea and SCE agreed to extend the SRAC fixed-price period through April 30, 2012; the California Public Utilities Commission granted full approval on October 19, 2006. Beginning May 1, 2007, Salton Sea will receive 6.15 cents per kilowatt-hour, escalating 1% annually. The new agreements will result in approximately $86 million of incremental revenue over the five year period compared to the current 5.37 cents earned per kilowatt-hour.

Prior to 2012, Fitch views CE Generation's credit profile as stronger than typical for the rating category. During this period, CE Generation is expected to receive significant cash flow from both Saranac and Salton Sea; distributions from Saranac alone are adequate to cover CE Generation's debt service. Fitch believes it is unlikely that distributions from Saranac will be trapped, as debt service coverage ratios (DSCRs) at the project are significantly above the distribution threshold. Similarly, Fitch believes that the fixed SRAC period largely mitigates a cash trap at Salton Sea. Consolidated DSCRs are expected to average 1.7 times (x) between 2007 and 2012.

The primary credit constraint is market exposure via SRAC pricing following the end of the fixed-price period in 2012. Fitch expects distributions from Saranac to fall away as it begins merchant operations, and that Salton Sea will eventually constitute the vast majority of CE Generation's cash flow. While Fitch projects DSCRs could average approximately 4.7x at Salton Sea and 2x at CE Generation on a consolidated basis after 2012, sensitivity analysis demonstrates a vulnerability to low SRAC prices. Under Fitch's low natural gas price assumptions, DSCRs could fall to less than 1.4x at CE Generation on a consolidated basis.

Annual debt service of Salton Sea decreases from roughly $42 million prior to 2010 to less than $25 million after 2012. Similarly, annual consolidated debt service of CE Generation and Salton Sea decreases from approximately $81 million prior to 2010 to less than $60 million after 2011. This pattern of decreasing debt service contributes significantly to the pattern of rising DSCRS; Salton Sea's projected cashflows are relatively consistent from year to year after 2009.

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