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Rating Action:

Moody's assigns Baa2 Issuer Rating to Silicon Valley Clean Energy Authority (CA) (SVCE); stable outlook

15 Jul 2020

New York, July 15, 2020 -- Moody's Investors Service, ("Moody's") has assigned a first-time Baa2 Issuer Rating to Silicon Valley Clean Energy Authority (CA) (SVCE). SVCE is a not-for-profit community choice aggregator (CCA) with an established operating record as a California Joint Powers Authority (JPA). The rating outlook is stable.

SVCE's 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 271,000 customers throughout municipalities and communities in Santa Clara County. SVCE's 13 municipal participants located in the silicon valley region of CA have a Aa2 weighted average credit quality, encompassing a customer base with very strong socio-economic conditions.

The rating also considers the inherent strengths of the California CCA model which provides SVCE with a captive and arguably sticky customer 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 choose 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 low for rated California CCAs, with SVCE experiencing an average overall opt-out rate of around 3.5% from its customer base since its April 2017 launch of service. These opt-out rates continue to remain steady into calendar year 2020 so far.

RATINGS RATIONALE

Despite the very strong socio-economic conditions within 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 2020, total load demand has declined appreciably with the drop ranging from a high of -9.4% in April, reducing to -7.6% through mid-June. The biggest impact to lower total demand has come from commercial load decline, 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% decline in April, but has improved since to ~ 18% by June 15th. Large commercial load has also been negatively impacted but not as severely as small and medium commercial load, as large commercial load is about 12-15% below what would have been expected in a pre-coronavirus environment. Large commercial load across SVCE's territory consists of high tech company headquarters and tech manufacturers which have been somewhat less impacted during the crisis.

SVCE does not anticipate load returning to FY 2019 levels until FY 2023, as it assumes a slow recovery and possible second wave of cases. Importantly, SVCE expects to maintain adequate levels of liquidity of around 200 days over the FY 2020-2022 period, 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&E rates to 1% from 4% (the discount level that SVCE's rates are currently set) in FY 2021, with a plan to restore them to the 4% discount level in FY 2022. SVCE's liquidity as of FY 2019 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 2021 and 2022, which would be viewed negatively for the rating.

Also, through 2022, SVCE will have less flexibility to generate excess cash to add to reserves, owing to the above mentioned load demand decline and anticipated slow economic recovery, along with a large Power Charge Indifference Adjustment (PCIA) fee increase coming up in October 2020 that will need to be absorbed by SVCE and its customers, reducing the rate headroom that has existed relative to PG&E's rates. We further understand that higher costs from recently entered power purchase agreements (PPAs) whose plants come on-line in late 2021 will moderately raise SVCE's costs but PPA costs will decline after 2022 when other plant resources are expected to come on-line. In a Moody's sensitized case, where operating revenues are modestly below management expectations during FY 2020 - FY 2024, days cash on hand (DCOH) are expected to hover around 180 days, and reserve levels are expected to be slightly below target reserves in FY 2021 and FY 2022, prior to beginning 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&E's rates, an important value consideration given the characteristics of SVCE's customer base, while growing its cash position to $120 million as of 2/28/2020, or approximately 198 days cash on hand. Given the CCA's exposure to PCIA, SVCE's ability to maintain rate competitiveness with PG&E could eventually lead to the CCA relying upon its use 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 charge is a short-to-medium term issue that will be addressed in subsequent regulatory hearings at the California Public Utilities Commission (CPUC) or through future legislative action, or will, in the future, be sized at a level that enables SVCE to remain rate competitive with PG&E while being cash flow 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) risk, in particular given its technology savvy commercial customer base. Due to cap limitations, however, only 1% of SVCE's load is eligible for DA in 2021, 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 risk to CCAs in general, and in particular to SVCE, given the characteristics of its service territory. However, SVCE anticipates managing this risk through its power procurement strategy which maintains a large open position over the long-term or by possibly 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 by 5% through calendar year 2020 owing to the COVID-related demand loss, but such surplus remains within its maximum tolerance band as outlined under its board approved risk management policy. As such, SVCE is not required to sell off supply ahead of the delivery month (i.e., liquidate positions); however, given current market prices, SVCE will likely sell any excess supply at a loss. Importantly, this position will end by year-end 2020, as SVCE is not fully contracted beyond calendar year 2020.

The rating assignment also considers CA CCAs and SVCE's 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 economic challenges arising from the coronavirus, the CA CCA model has not gone through different economic cycles, and is still susceptible to changes in the CA 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 price declines are creating a severe credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial impact 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 2021 despite load demand decline given some flexibility built-into its supply contract positions, while temporarily compressing its discount to PG&E rates. Further, the stable outlook incorporates our expectation the SVCE's economic service territory will remain strong and supportive of a clean energy value proposition offered by SVCE through the CCA model for customers in Santa Clara County.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

- Significant strengthening of liquidity position, through continued trend of sound financial operations

- Demonstrated resiliency and flexibility in response to market changes or economic weakness

- Narrowing or de-risking of power related remarketing risk

- Broader statutory acceptance of the CCA business model

- Successful in establishing longer term commercial contracts under developing customer retention program

- More favorable future treatment concerning the PCIA allocation that results in less pricing volatility or adequate cost allocation

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

- Significant and permanent load loss, impacting SVCE's ability to remain competitive and negatively impacting ability to maintain or increase 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&E's generation rates

- Changes to state policies that weaken CCA's competitive position

- Inability to manage power procurement market risk such that cost volatility, financial losses or customer under-collections and an increase in opt-out rates occur

LEGAL SECURITY

Not applicable

USE OF PROCEEDS

Not applicable

PROFILE

Headquartered in Sunnyvale, CA, Silicon Valley Clean Energy Authority (SVCE) is a California Joint Powers Authority (JPA) formed in March 2016 and created to provide all customers with carbon-free electricity within Santa Clara County. 12 cities and unincorporated Santa Clara County unanimously executed the joint powers agreement to participate in clean energy aggregation. SVCE provides electric service to more than 271,000 retail customers as a CCA under the CPUC Code Section 366.2. SVCE has the rights and powers to set rates for the electricity it furnishes, incur indebtedness, and issue 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 US Municipal Joint Action Agencies Methodology published in August 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1163699. 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.

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_1133569.

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.

Jennifer Chang
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
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Angelo Sabatelle
Additional Contact
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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