NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of the California Independent System Operator (CAISO) as follows:
--Issuer Default Rating (IDR) at 'A+';
--2013 secured revenue refunding bonds at 'AA-'.
The Rating Outlook is Stable. Approximately $202 million of debt is affected by today's rating action.
In addition, Fitch Ratings has withdrawn its ratings for the California Infrastructure & Economic Development Bank (CA) (California Independent System Operator Corporation Project) revenue bond series 2009A due to prerefunding activity.
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 with regard to reliability, competition, renewable energy and environmental issues;
--The company's first priority lien on market collections;
--Constructive federal regulatory oversight;
--The solid credit profile 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.
Addition of New Members: CAISO is expanding its real time energy market to other balancing authorities in the western U.S. under an initiative known as the Energy Imbalance Market (EIM). In June 2014, CAISO received FERC approval to expand its real time energy market to include Pacificorp (IDR: 'BBB'; Stable Outlook), with a go-live date scheduled for Oct. 1, 2014. PacifiCorp is the first balancing authority to join and its service territory encompasses six states. In addition, NV Energy Inc. (IDR: 'BBB-'; Stable Outlook) has applied with Public Utilities Commission of Nevada to join the real time energy market, effective October 2015. Since May 2014, CAISO's real time energy market has incorporated 15-minute transmission scheduling as per FERC order 764. The expanded energy market will leverage resource diversity over a larger geographic area, reduce costs, and will facilitate greater penetration of renewable energy while creating a more liquid power market. Total cost benefits of an EIM between CAISO and Pacificorp are projected to range from $21 million to $129 million per annum across low, medium, and high transmission transfer capability scenarios.
Assured Cost Recovery: Fitch's confidence in CAISO's ability to consistently and fully recover its costs is a function of the company's ability to adjust rates quarterly without prior approvals. The ratings also consider CAISO's first-priority lien on market collections, a constructive regulatory environment at the FERC, and the strong credit profile of California's three largest IOUs.
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.
Fitch notes that the ratings of CAISO's 2013 series bonds reflect the collateral pledge of CAISO's headquarters in Folsom, CA, which was completed in 2011.
Creditworthy Members: The three largest IOUs in California: Pacific Gas & Electric (PG&E; IDR 'BBB+'; Stable Outlook by Fitch), Southern California Edison (SoCalEd; IDR 'A-'; Stable Outlook), and San Diego Gas and Electric (SDG&E; IDR 'A'; Stable Outlook) represent approximately 63% of CAISO's GMC. 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: Importantly, 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.
In 2013, CAISO recorded approximately $4.1 billion of market collections compared with $3.2 billion in 2012, $2.4 billion in 2011, $2.1 billion in 2010, and $1.6 billion in 2009. The ratio of total market collections-to-GMC approximated 21x in 2013 as compared to 17.1x, 12.5x, 10.5 x, and 8.1x in 2012, 2011, 2010, and 2009, respectively. Going forward, 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 rates quarterly if there is a 2% deviation or $1 million difference in current versus budgeted costs without FERC or board approval.
Liquidity: Fitch deems CAISO's liquidity position to be 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.
Severe Drought; Reliability Unaffected: Significantly lower than normal hydrologic conditions in California due to severe drought is expected to cause up to 1,150 MW of water supply curtailments this summer. However, these curtailments are not expected to materially impact the reliability of the ISO system due to significant generation additions (primarily solar), sufficient energy imports, and moderate peak demand growth. A total of 3,243 MW of new generation is expected to enter commercial operation this summer and is comprised of 61% solar, 32% natural gas, and 7% other. CAISO's forecasted summer operating reserve margins are expected to be 23.8%, greater than the California Public Utility Commission's 15% resource adequacy requirement for planning reserve margin. The main impact of the drought during summer 2014 will be an increase in natural gas generation.
Finally, CAISO will play a key role in California's ambitious renewable energy policies. The state of California currently has a 33% renewable portfolio standard (RPS) by 2020, which will require new transmission investments in the next decade.
Rating concerns primarily relate to CAISO's membership and geographic concentration, moderately high operating costs, as well as the voluntary nature of CAISO participation.
Positive Rating Action: No credit rating upgrades are expected at this time.
Negative Rating Action: A substantive adverse change to regulatory oversight or a broad energy policy change at the federal and/or state levels;
-A large contingent of members departing or a cybersecurity event.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Utilities, Power and Gas Companies, March 7, 2014;
--'Corporate Rating Methodology', May 28, 2014;
--'Parent and Subsidiary Rating Linkage', Aug. 5, 2013.
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)