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California Statewide Communities Dev. Auth. -- Moody's assigns A1 rating to California ISO revenue bonds; outlook stable

·15 min read

Rating Action: Moody's assigns A1 rating to California ISO revenue bonds; outlook stable

Global Credit Research - 07 Jan 2021

Approximately $176 million of debt rated

New York, January 07, 2021 -- Moody's Investors Service, ("Moody's") today assigns an A1 senior unsecured rating to California Independent System Operator Corporation's (CAISO) new revenue bond issuance. The new bonds are industrial revenue bonds issued through the California Statewide Communities Development Authority as the conduit. The bonds are senior unsecured obligations of CAISO. Bond proceeds of about $176 million will be used to defease CAISO's outstanding revenue bonds issued by California Infrastructure & Econ. Dev. Bank, its only debt issuance outstanding. The outlook is stable. See below for a complete list of rating actions.

Assignments:

..Issuer: California Statewide Communities Dev. Auth.

....Senior Unsecured Revenue Bonds, Assigned A1

RATINGS RATIONALE

CAISO's rating reflects the essential and established role it plays in California's electricity market as the independent, nonprofit operator of most of the state's high voltage power grid as well as its wholesale markets. CAISO has the operational control of the transmission grid within its control area. Its role is therefore literally essential to keeping the lights on for Californians.

CAISO's financial stability is critical to the functioning of the grid. For physical power to be delivered within its control area, the delivery must be scheduled in combination with a trade with the ISO. The ISO is the central counterparty to all the market participants. Wholesale market participants, including generators, load-serving entities and intermediaries, rely on the ISO to not only transmit the power but also to collect payments from buyers and make payments to sellers.

CAISO has a stable source of revenue. CAISO adds a grid management charge to market participants on each trade to cover its costs, which include operating costs, capital costs, debt service, and reserves. Since 2004, the grid management charge has been established via a FERC formula subject to specific revenue requirement caps for varying periods of time.

CAISO has a strong financial security for its financial obligations because it has a first priority claim on the market revenues that are deposited into its clearing accounts. In the event that a market participant defaults on its payment obligation or fails to pay its grid management fee, the ISO can first draw on the collateral provided by the defaulting counterparty, and if needed, from the market clearing account. The loss is then socialized to non-defaulting participants.

The ISO's adjusted CFO pre-WC to debt has averaged about 26% for the past three years (2017-2019) and we expect the ratio to be maintained above 20% on a run-rate basis.

Liquidity

CAISO's liquidity is comfortably buttressed by a large amount of unrestricted cash holdings and a first priority claim on market revenues.

Even though CAISO does not have any external revolving credit facilities, it maintains a large unrestricted cash balance (over $200 million in 2018 and 2019). In comparison, according to its 2021 budget, CAISO's entire revenue requirement is only about $181 million. CASIO has a large unrestricted cash balance because cash reserves for capital expenditures, operating expenses, debt service and other expected liabilities are considered to be unrestricted cash. If necessary, these reserve accounts may be accessed for any of CAISO's liquidity needs.

CAISO also has a first priority claim on its market clearing accounts. However, we expect the CAISO to access market revenues only as a last resort and only in case of an emergency.

CAISO does not have any major upcoming debt maturities because it only has amortizing debt.

Rating Outlook

The stable outlook reflects our view that CAISO will continue to play an integral, essential and effective role in California's energy markets, and that its established rate-setting policies and first priority claim on market revenues will remain in place and sustain its credit quality.

Factors that Could Lead to an Upgrade

- Increased diversification, for example as a result of material expansion to regions outside of California's service territory.

- A material improvement in the credit quality of the state's investor owned utilities

Factors that Could Lead to a Downgrade

- In the unlikely event there were to be successful challenges to the CAISO's essential role in the state's electric industry

- If an unanticipated departure of a significant member permanently and materially impacts revenues and debt service coverage

Company Profile

CAISO is a nonprofit public benefit corporation incorporated in May 1997. It is responsible for the operation of long-distance, high voltage power lines throughout most of California that also deliver power to and from neighboring control areas and states, along with Canada and Mexico. CAISO offers open access to the transmission system through a market for electricity and related services, thereby fostering a competitive wholesale marketplace. CAISO's all-time system peak load record of 50,270 MW was set in July of 2006.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Toby Shea VP - Senior Credit Officer Infrastructure Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Michael G. Haggarty Associate Managing Director Infrastructure Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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