July 20, 2016 - 10:50 AM EDT
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Fitch Affirms California ISO's IDR at 'A+'; Outlook Stable

Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of the California Independent System Operator (CAISO) at 'A+' with a Stable Rating Outlook. Approximately $183 million of secured debt is affected by today's rating action. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

--CAISO's ability to adjust rates quarterly without regulator or board approval;

--The integral role played by the CAISO in achieving state and federal energy policy goals;

--The company's first priority lien on market collections;

--Constructive federal regulatory oversight;

--The solid credit profiles of California's three largest investor-owned utilities (IOUs);

--Geographic and membership concentration and the voluntary nature of CAISO participation.

CAISO's ratings and Stable Outlook reflect the stable revenues and cash flows derived from its Federal Energy Regulatory Commission (FERC) regulated tariff structure, strong grid management charge (GMC) coverage ratios, and the integral role played by the company in achieving state and federal energy policy goals with regard to reliability, competition, renewable energy and environmental issues.

Assured Cost Recovery: Fitch's confidence in CAISO's ability to consistently and fully recover its costs is a function of CAISO's ability to adjust rates quarterly without prior approval. The ratings also consider CAISO's first priority lien on market collections, a constructive regulatory environment at the FERC and the creditworthiness of California's IOU's.

Addition of New Members: CAISO is expanding its Energy Imbalance Market (EIM) to include other balancing authorities in the western U.S. CAISO's EIM is expanding and current and prospective members include: PacifiCorp (PPW, 'A-'/Outlook Stable); NV Energy Inc. (NVE, 'BBB-'/Outlook Stable); Arizona Public Service Co. (APS, 'A-'/Outlook Stable); Puget Sound Energy (PSE, not rated); Portland General Electric (PGE, not rated); and Idaho Power (IDP, not rated).

PPW joined the EIM in November 2014, and NVE joined in December 2015. APS and PSE are expected to join in October 2016, PGE in October 2017 and IDP in April 2018. The expanded EIM is expected to leverage resource diversity over a larger geographic area, reduce costs and facilitate greater penetration of renewable energy while creating a more liquid power market. The EIM automatically balances electric demand with supply every 15 minutes and incorporates five minute generation dispatch. PacifiCorp, one of the West's largest balancing authorities, is considering participating in the CAISO as a full transmission member by turning over control of its transmission assets to CAISO, which could potentially lower GMC rates by up to 20%.

Limited Gas Availability; Adequate Reserve Margins: Due to limited gas supply withdrawal capability at the strategic Aliso Canyon Gas Storage Facility, CAISO has identified that up to 9,500MW of gas fired capacity remains at risk for curtailments in gas constrained Southern California during the hottest days of the summer. To mitigate the effect of potential curtailments approximately 15 bcf of gas storage at Aliso Canyon along with demand response initiatives will be utilized to maintain system reliability during peak demand. However, while supplies are expected to be adequate under typical summer conditions, service interruptions cannot be ruled out. A total of 2,306 MW of new generation capacity is expected to enter commercial operation this summer and is comprised of 85% solar, 6% natural gas, 4% wind, 4% hydro and 1% of biogas. Hydrological conditions in the state are near normal levels, and CAISO's forecasted summer operating reserve margins are expected to be 24.4%, greater than the California Public Utility Commission's 15% resource adequacy requirement for planning reserve margin.

IOUs on Track to Meet 33% RPS: CAISO will play a key role in achieving California's ambitious renewable energy policies. The State of California currently has a 33% renewable portfolio standard (RPS) by 2020 that increases to 50% RPS by 2030, which will require new transmission and renewable investments in the next decade. Renewable generation comprised 28%, 23% and 32% of PG&E, SCE and SDG&E's total retail sales, respectively, as of 2014. Notably, solar generation comprised 11% of CAISO's total generation resource mix for 2015, an increase of roughly 2% when compared to the prior year. Going forward, due to falling solar PV panel prices and installation costs, Fitch expects this trend to continue.

New Flexible Capacity Product: CAISO will be introducing a new flexible capacity product this fall to preserve fast ramping generating capability to support intermittent renewable generation. The need for fast ramping capacity is growing with renewable generation as California progresses towards its 50% RPS requirement by 2030.

Creditworthy Members: The grid management charge paid by the three largest IOUs in California: Pacific Gas & Electric (PG&E, IDR 'BBB+'/Outlook Positive), Southern California Edison (SoCalEd, IDR 'A-'/Outlook Stable), and San Diego Gas and Electric (SDG&E, IDR 'A'/Outlook Stable) represents approximately 57% of CAISO's total revenue. The CAISO administers a GMC, approved by the FERC, to market participants to recover all of the company's costs (including operating, capital expenditure and debt service), and to provide an operating reserve.

First-Priority Lien on Market Collections: CAISO's tariff provides a first priority lien on collections for market participants if there is a shortfall in GMC collections. With the implementation of the MRTU, there is now a greater breadth of market revenues to backstop GMC payments in the unlikely event of the default of large participants.

MRTU Enhances Market Volumes: The successful implementation of the new energy market (also known as the market redesign and technology upgrade [MRTU]) has significantly enhanced market volumes and collections, supporting CAISO's creditworthiness and enhancing its strategic role in implementing California's energy policies.

In 2015, CAISO recorded approximately $3.7 billion of market collections compared with $5 billion in 2014, $4.4 billion in 2013, $3.2 billion in 2012, and $2.4 billion in 2011. The ratio of total market collections-to-GMC approximated 18.6x in 2015 as compared to 25.4x, 21x, 17.1x, and 12.5x, in 2014, 2013, 2012, and 2011, respectively. The decrease in total market collections in 2015 is primarily due to lower power prices and increased renewable penetration. As the EIM continues to expand, Fitch expects total market collections and the ratio of total market-collections-to-GMC coverage ratios to continue to be robust.

GMC Revenue Requirement: CAISO budgets into its annual GMC revenue requirement 1.25x debt service coverage and 15% operating expense reserves. The operating reserve account is fully funded at all times. Any over-collections above the 15% reserve are used to offset future year GMC revenue requirements. Additionally, CAISO is authorized to adjust GMC rates quarterly if collections are deviating from budgeted amounts by the greater of 2% or $1 million, without FERC or board approval.

Rating concerns primarily relate to CAISO's membership and geographic concentration, moderately high operating costs, as well as the voluntary nature of CAISO participation. CAISO's 2013 series bonds are secured by a collateral pledge of its headquarters in Folsom, CA, which was completed in 2011.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for CAISO include:

--GMC revenue requirement cap of $202 million;

--Capex averaging $25 million per annum through 2018;

--Long-Term debt maturities of $4.5 million in 2016, $4.6 million in 2017, and $4.8 million in 2018.

RATING SENSITIVITIES

What Could Trigger a Positive Rating Action: A positive credit rating action is not anticipated at this time.

What Could Trigger a Negative Rating Action: A substantive adverse change to regulatory oversight or a broad energy policy change at the federal or state levels; significant membership departures; adverse impacts from cyber or physical infrastructure attack; and competitive threats from emerging technologies could lead to future credit rating downgrades.

LIQUIDITY

Fitch views CAISO's liquidity position as adequate, despite the absence of credit lines. The company relies largely on cash balances for working capital needs and has substantial investments, some of which could be readily liquidated in a funding emergency. CAISO is a party to the transactions that clear through the market as per FERC Order 741 in 2011 that required the ISO/RTOs to become central counterparties. Counterparty credit risk is mitigated by weekly settlements and collateral requirements. In the event of a market default any shortfalls are allocated among market participants.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings:

California Independent System Operator

--IDR at 'A+';

-- Secured revenue refunding bonds at 'AA-'.

Date of Relevant Rating Committee: July 19, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009171

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009171

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst:
Daniel Neama, +1-212-908-0561
Associate Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Julie Jiang, +1-212-908-0708
Director
or
Committee Chairperson:
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
[email protected]


Source: Business Wire (July 20, 2016 - 10:50 AM EDT)

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