Rating Action: Moody's assigns Baa2 Issuer Rating to Silicon Valley Clean Energy Potency (CA) (SVCE); stable outlook
Global Credit Research - xv Jul 2022
New York, July 15, 2022 -- Moody's Investors Service, ("Moody'south") has assigned a get-go-time Baa2 Issuer Rating to Silicon Valley Make clean Energy Authority (CA) (SVCE). SVCE is a not-for-profit community pick aggregator (CCA) with an established operating record as a California Joint Powers Authorisation (JPA). The rating outlook is stable.
SVCE'south Baa2 Issuer Rating recognizes the economically robust service area of SVCE's service territory and its status as a not-for-profit California Community Choice Aggregator (CCA) serving more than than 271,000 customers throughout municipalities and communities in Santa Clara Canton. SVCE's 13 municipal participants located in the silicon valley region of CA have a Aa2 weighted boilerplate credit quality, encompassing a customer base of operations with very strong socio-economic conditions.
The rating besides considers the inherent strengths of the California CCA model which provides SVCE with a captive and arguably sticky client base allowing for reliable revenues and cash flows on a consistent basis, which is helpful for energy procurement planning purposes. The legislation enabling CCAs in CA has an opt-out provision, meaning that all customers within SVCE's service territory automatically become customers of the CCA unless they cull to opt-out and return to the investor-owned utility provider, in this case, Pacific Gas & Electric Company (PG&E). Opt-out rates have remained depression for rated California CCAs, with SVCE experiencing an average overall opt-out rate of around 3.5% from its customer base since its April 2022 launch of service. These opt-out rates proceed to remain steady into agenda year 2022 and so far.
RATINGS RATIONALE
Despite the very strong socio-economic conditions inside SVCE's service area, a core underpinning of the SVCE's credit profile, the service territory does include a large commercial customer segment making SVCE disproportionally negatively impacted by the Shelter in Place (SIP) measures associated with COVID 19. From March - June 2022, total load need has declined appreciably with the drop ranging from a high of -9.4% in April, reducing to -7.vi% through mid-June. The biggest impact to lower total demand has come from commercial load reject, with residential load increasing slightly and serving to moderate the decline. Residential load has increased on average ~ 9% from March-June 15th, while small and medium commercial load experienced a 25% pass up in April, simply has improved since to ~ xviii% by June 15th. Big commercial load has also been negatively impacted but not as severely as small and medium commercial load, every bit large commercial load is most 12-15% beneath what would take been expected in a pre-coronavirus environment. Large commercial load across SVCE's territory consists of high tech company headquarters and tech manufacturers which accept been somewhat less impacted during the crisis.
SVCE does not anticipate load returning to FY 2022 levels until FY 2023, as it assumes a irksome recovery and possible second wave of cases. Chiefly, SVCE expects to maintain acceptable levels of liquidity of around 200 days over the FY 2022-2022 menstruum, which surpasses its internal target of 50% of prior years' operating expenses. SVCE expects to achieve these liquidity targets by reducing the discount on its rates relative PG&East rates to 1% from 4% (the discount level that SVCE'south rates are currently set) in FY 2022, with a plan to restore them to the four% discount level in FY 2022. SVCE's liquidity equally of FY 2022 was 198 days, with $119 million of cash. We note that should SVCE choose not to compress the discount, liquidity will be negatively impacted during FY 2022 and 2022, which would exist viewed negatively for the rating.
Also, through 2022, SVCE will have less flexibility to generate excess cash to add together to reserves, attributable to the above mentioned load demand decline and anticipated ho-hum economic recovery, forth with a large Power Charge Indifference Adjustment (PCIA) fee increase coming up in October 2022 that will need to exist captivated by SVCE and its customers, reducing the rate headroom that has existed relative to PG&Eastward'southward rates. Nosotros farther understand that college costs from recently entered power buy agreements (PPAs) whose plants come up on-line in late 2022 will moderately raise SVCE's costs just PPA costs will decline after 2022 when other plant resource are expected to come up on-line. In a Moody's sensitized case, where operating revenues are modestly below management expectations during FY 2022 - FY 2024, days cash on hand (DCOH) are expected to hover around 180 days, and reserve levels are expected to exist slightly below target reserves in FY 2022 and FY 2022, prior to first to exceed target reserves in FY 2023 and FY 2024.
SVCE has been able to maintain its rate competitiveness relative to PG&E since its inception, by offering rates set at discounts ranging from 1-6% to PG&Due east'southward rates, an of import value consideration given the characteristics of SVCE's customer base, while growing its greenbacks position to $120 million equally of 2/28/2020, or approximately 198 days greenbacks on hand. Given the CCA'due south exposure to PCIA, SVCE'southward ability to maintain rate competitiveness with PG&Due east could eventually pb to the CCA relying upon its utilize of internal liquidity sources to stay below PG&E generation rates, a credit negative. Our rating incorporates a view that the challenges facing CCAs, including SVCE, regarding the PCIA accuse is a short-to-medium term result that will be addressed in subsequent regulatory hearings at the California Public Utilities Commission (CPUC) or through futurity legislative activity, or will, in the future, be sized at a level that enables SVCE to remain rate competitive with PG&East while being greenbacks period positive.
As discussed, SVCE has a high share of commercial and industrial load and revenues, at around 65% of the total, a credit negative. This exposure is somewhat higher that its CCA peers in CA, which increases SVCE's exposure to direct access (DA) take a chance, in particular given its technology savvy commercial customer base. Due to cap limitations, nonetheless, only ane% of SVCE's load is eligible for DA in 2022, of which 50% of that load is expected to depart while the other half has chosen to remain with SVCE. We recognize that the potential for the cap to be raised in the state remains, subject to legislative and regulatory changes that could occur in the medium term, which presents a hazard to CCAs in general, and in detail to SVCE, given the characteristics of its service territory. However, SVCE anticipates managing this risk through its power procurement strategy which maintains a big open up position over the long-term or past mayhap entering into longer-term agreements at preferential rates with industrial or large commercial customers.
With respect to power procurement considerations, SVCE is currently contracted at a surplus to its needs past five% through calendar year 2022 owing to the COVID-related demand loss, but such surplus remains within its maximum tolerance band as outlined under its board approved adventure management policy. As such, SVCE is not required to sell off supply ahead of the delivery month (i.e., liquidate positions); yet, given current market prices, SVCE volition likely sell whatever backlog supply at a loss. Importantly, this position will end by year-cease 2022, as SVCE is not fully contracted beyond calendar yr 2022.
The rating assignment also considers CA CCAs and SVCE'due south limited history of operations, and the lack of tested regulations and provisions regarding municipalities' obligations towards CCAs should they choose to depart. Further, notwithstanding the current economical challenges arising from the coronavirus, the CA CCA model has not gone through different economic cycles, and is notwithstanding susceptible to changes in the CA free energy market with respect to resource adequacy requirements, PCIA and DA.
The rapid spread of the coronavirus outbreak, the deteriorating global economic outlook, falling oil prices, and asset cost declines are creating a severe credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Nosotros regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial affect it is having on public health and safety, with credit implications that will continue to play out in the years to come.
RATING OUTLOOK
The stable outlook reflects expectations that SVCE will maintain an adequate liquidity profile through FY 2022 despite load demand refuse given some flexibility congenital-into its supply contract positions, while temporarily compressing its discount to PG&East rates. Further, the stable outlook incorporates our expectation the SVCE's economic service territory volition remain potent and supportive of a clean free energy value proffer offered past SVCE through the CCA model for customers in Santa Clara County.
FACTORS THAT COULD Atomic number 82 TO AN UPGRADE OF THE RATING
- Significant strengthening of liquidity position, through continued trend of audio financial operations
- Demonstrated resiliency and flexibility in response to market changes or economical weakness
- Narrowing or de-risking of power related remarketing risk
- Broader statutory acceptance of the CCA business organization model
- Successful in establishing longer term commercial contracts under developing customer retention programme
- More than favorable hereafter treatment concerning the PCIA allocation that results in less pricing volatility or acceptable cost resource allotment
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING
- Meaning and permanent load loss, impacting SVCE'southward ability to remain competitive and negatively impacting ability to maintain or increment electric current liquidity level going forward
- Reluctance or lack of willingness to raise rates such that liquidity profile weakens below 180 DCOH
- Erosion of cost competitiveness relative to PG&Eastward's generation rates
- Changes to state policies that weaken CCA's competitive position
- Inability to manage power procurement market gamble such that cost volatility, financial losses or customer under-collections and an increment in opt-out rates occur
LEGAL SECURITY Not applicable USE OF Proceeds Not applicable Contour
Headquartered in Sunnyvale, CA, Silicon Valley Clean Energy Authority (SVCE) is a California Joint Powers Authority (JPA) formed in March 2022 and created to provide all customers with carbon-gratis electricity inside Santa Clara County. 12 cities and unincorporated Santa Clara County unanimously executed the joint powers understanding to participate in clean energy aggregation. SVCE provides electric service to more than 271,000 retail customers every bit a CCA under the CPUC Code Section 366.2. SVCE has the rights and powers to set rates for the electricity information technology furnishes, incur indebtedness, and result bonds or other obligations.
SVCE is governed by a board of directors consisting of elected representatives from each jurisdiction. SVCE has a local rate-setting process in which its board has authority to raise rates to grow annual revenues and reserves, if needed.
METHODOLOGY
The principal methodology used in this rating was United states Municipal Articulation Action Agencies Methodology published in August 2022 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1163699. Alternatively, please see the Rating Methodologies page on world wide web.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 class. Moody's Rating Symbols and Definitions can exist establish at: https://world wide web.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this declaration provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or annotation of the aforementioned series, category/grade of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accord with Moody'south rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the back up provider and in relation to each particular credit rating action for securities that derive their credit ratings from the back up provider'southward credit rating. For provisional ratings, this proclamation provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may exist assigned subsequent to the concluding issuance of the debt, in each case where the transaction structure and terms accept not changed prior to the assignment of the definitive rating in a manner that would have afflicted the rating. For farther information delight run across the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicative, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit assay tin exist plant at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
Please see www.moodys.com for any updates on changes to the atomic number 82 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 boosted regulatory disclosures for each credit rating.
Jennifer Chang Lead Analyst Project Finance Moody's Investors Service, Inc. 7 World Trade Heart 250 Greenwich Street New York 10007 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Angelo Sabatelle Additional Contact Project Finance JOURNALISTS: 1 212 553 0376 Client Service: i 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: i 212 553 0376 Client Service: 1 212 553 1653
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