New York, November 14, 2012 -- Moody's Investors Services affirmed La Paloma Generating Company, LLC's (La Paloma or Project) B2 rating on its 1st lien loan facilities and changed the outlook to negative from stable.

Ratings Rationale

The change in outlook to negative reflects a potential drop in the consolidated debt service coverage ratio (DSCR) to around 0.80 times and the FFO to consolidated debt ratio around -2% over the next two years under scenarios considered by Moody's. These metrics are lower than the previous expectations of 1.2 times consolidated DSCR and FFO to consolidated debt in excess of 2%. Under management's revised base case forecast, the project is forecasted to have consolidated DSCR of around 1 times for 2013 and rising thereafter, which is also lower than Moody's previous expectation. For purposes of these calculations, Moody's includes the $110 million of second lien debt in the calculations.

Key drivers of the lower expected consolidated DSCR are lower than expected wholesale power prices due to persistent low natural gas prices and higher costs due to the expected implementation of the carbon cap-and-trade program in California. The first carbon auction will take place on November 14th of this year for the 2013 and 2015 carbon credits. La Paloma, which will have one of its four units contracted under a tolling agreement (MS Toll) with Morgan Stanley Capital Group (MSCG) through 2013, does not currently have a pass through of carbon costs, while the heat-rate call options for 2013-2015 have an assumed fixed price of carbon included in the project's variable O&M payments. Moody's understands La Paloma and other projects with legacy contracts are working on a settlement and Moody's currently incorporates the assumption that the project will receive necessary carbon credits for the MS Toll.

The affirmation of the B2 rating on La Paloma's first lien debt reflects the project's near term liquidity, which should provide the project some flexibility to address expected lower cash flow. Moody's also recognizes that the extended outage at the two-unit 2,200 MW San Onofre Nuclear Generating Station (SONGS) and the introduction of carbon costs should result in higher merchant energy margins for the project assuming all else is equal. Additionally, the B2 rating considers improved operating performance since 2009, the project's competitive position in the California market, and relatively low leverage on a first lien only basis.

The negative outlook reflects expectations of declines in cash flow over the next few years possibly leading to DSCRs below 1.0 times and potential draws on internal liquidity.

In light of the negative rating outlook, La Paloma's rating could stabilize if the project is able to sustain consolidated DSCR of at least 1.10 to 1.20 times and FFO to Consolidated Debt of 2%, maintain good operations, preserve its internal liquidity, and successfully execute a settlement that provides for a recovery of carbon costs under the MS Toll.

La Paloma's rating could decline if the project sustains DSCR below 1.0 times, the project incurs major operational problems, the project is unable to recover its carbon costs under the MS Toll or if its liquidity significantly declines.

La Paloma Generating Company, LLC. (La Paloma or Project) owns a four-unit 1,022 megawatt (mw) gas-fired combined-cycle electric generating facility located in Kern County, California. La Paloma consists of four turbines, three of which are currently under contract and one merchant unit available to take advantage of market demand and serve as backup capacity. The project achieved commercial operations in March 2003.

The last rating action on La Paloma occurred on July 20, 2011 when Moody's assigned a B2 rating to La Paloma's 1st lien secured debt facilities.

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.

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Clifford J Kim Vice President - Senior Analyst Project Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653A.J. Sabatelle Senior Vice President Project 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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