Fitch Affirms CE Generation, LLC's $400MM Senior Notes at 'BB-'; Outlook Revised to Stable

Fitch Ratings has affirmed the 'BB-' rating for CE Generation, LLC's (CE Gen) $400 million senior notes ($135.8 million outstanding) due in 2018. The Rating Outlook was revised to Stable from Negative.

KEY RATING DRIVERS

The rating reflects susceptibility to unfavorable market conditions and restricted distributions from portfolio projects with structurally senior outstanding debt. The Outlook has been revised to Stable based on parent Berkshire Hathaway Energy Company's (BHE, rated 'BBB+' with a Negative Watch by Fitch) track record of providing equity support to fund capital expenditures (capex) and meet debt service shortfalls. The rating considers the likelihood that BHE will continue to provide equity support as needed for the remaining four-year debt term.

Operations Supported by Sponsor Investment - Operation Risk: Midrange

CE Gen's geothermal and natural gas projects have stable operating histories that employ proven technologies. The parent, BHE, is contributing equity to fund a robust multi-year capex plan to support long-term operations.

Stable Resource, Adequate Supply - Supply Risk: Midrange

The geothermal resource has been relatively stable since the projects began commercial operation and it is expected to be viable beyond 2040, suggesting there is residual value for the parent beyond the term of the debt. The natural gas assets procure fuel via tolling or marketing agreements.

Exposure to Volatile Energy Pricing - Revenue Risk: Weaker

Volume risk is mitigated through power purchase agreements (PPAs), primarily with Southern California Edison (SCE)

('A-'; Rating Outlook Stable). However, the majority of energy revenues are exposed to variable Short-Run-Avoided-Cost (SRAC) pricing, introducing substantial price risk to cash flow. Many projects are also exposed to non-reimbursed curtailment by SCE or the transmission provider.

Subordinated Position - Debt Structure: Weaker

CE Gen's cash flow is reliant on distributions from the Salton Sea Funding Corporation (SSFC), a portfolio of geothermal projects which has semi-annually amortizing debt that is structurally senior to CE Gen. SSFC's distribution trigger is relatively high (1.50x), and ongoing cash traps have led to financial pressure at CE Gen.

Weakened Financial Profile

The average consolidated DSCR from 2015 - 2018 hovers near breakeven levels in Fitch's rating case. This suggests that CE Gen's ability to meet debt obligations is vulnerable to deterioration in the operating environment. If operating cash flow is insufficient to cover debt payments, CE Gen may need to rely on nonobligatory sponsor equity injections or access its debt service reserve to avoid default.

Peer Comparison

The assets within Coso Geothermal Holdings, LLC ('C') have suffered substantially greater resource depletion than those within the CE Gen portfolio. OrCal Geothermal Inc. ('BB' Rating Outlook Stable) has less exposure to PPA price risk and has no structural subordination. FirstLight Hydro Generating Company ('BB-'; Rating Outlook Negative) is a portfolio of projects with revenue price risk and coverage ratios consistent with a lower rating, but buoyed by demonstrated sponsor support from a higher rated owner.

RATING SENSITIVITIES

Negative: A departure from the precedent of equity injections to meet debt payment shortfalls would signal a change in the sponsors' view of CE Gen's long-term value and result in a downgrade.

Negative: Further deterioration in the operating environment due to persistently low PPA prices, reduced geothermal energy generation, or long duration curtailment suggesting coverage levels below rating-case expectations could trigger a downgrade.

SECURITY

The senior notes are secured by all assets of CE Gen, including the residual cash flow of its portfolio of 13 energy projects, as well as equity interests in the project companies, and all operational and depository accounts.

CREDIT UPDATE

The rating affirmation and outlook revision reflect continued parent equity contributions to support capex and portfolio debt service. Parent BHE continues to provide equity in support of drilling and production enhancements to ensure long-term stable operations. While operational performance is improving, low PPA prices and ongoing transmission curtailment have limited net operating income. There have been no distributions to CE Gen from the geothermal assets held within the SSFC portfolio since 2013, and CE Gen will only meet its 2014 semi-annual debt payments with equity support from BHE.

Debt service coverage at the CE Gen level was 0.14x in June 2014, and Fitch projects a DSCR of 0.17x for the 2014 calendar year based on operating cash flow. Without BHE's support of approximately $30 million of cash this year, CE Gen would have needed to access its LC-funded reserve to meet debt obligations. Looking forward, Fitch expects further equity support may be necessary for CE Gen to avoid default. Under Fitch's rating case, which incorporates unfavorable PPA pricing (using a low gas price scenario) to stress portfolio cash flow, DSCRs dip below breakeven levels in two of the remaining four years of the debt term.

Fitch believes it likely that BHE will continue to fund capex and contribute equity as needed to meet debt service obligations over a relatively short remaining four-year debt term. Including the expected equity contribution in December 2014, owners will have contributed $88 million to both CE Gen and SSFC in the past two years.

BHE has demonstrated its intention to retain the assets beyond debt maturity through its June 2014 purchase of TransAlta's 50% ownership interest in CE Gen and its ongoing efforts to re-contract portfolio assets. While BHE has not provided an equity contribution agreement, these actions establish a track record of support and indicate that BHE is unlikely to allow CE Gen to default. A lack of support from BHE to fund debt service shortfalls would likely trigger a downgrade.

CE Gen is a special purpose holding company created solely to issue the senior secured notes and hold the equity interests in 13 generating assets with an aggregate net ownership interest of 769 megawatts. CE Gen's 10 geothermal facilities are located in the Imperial Valley near Calipatria, California, and its three gas fired facilities are located in Plattsburg, New York (Saranac); Big Springs, Texas (Power Resources); and Yuma, Arizona (Yuma), respectively. CE Gen is 100% owned by BHE.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Thermal Power Projects' (July 30, 2014).

Applicable Criteria and Related Research:

Rating Criteria for Thermal Power Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753208

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=931675

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