Bonds and Financing

Moody’s assigns investment grade credit rating to CCA

Moody’s Investors Service on May 6 assigned a first-time Baa2 issuer rating to Peninsula Clean Energy (PCE), a California community choice aggregator (CCA).

PCE’s outlook is stable.

Moody’s said that the CCA’s Baa2 issuer rating recognizes the economic strength of the service territory as a not-for-profit California CCA serving more than 285,000 customers throughout all communities in San Mateo County. PCE was formed in March 2016.

“The rating considers the inherent strengths of the California CCA model which provides PCE with a captive and arguably sticky customer base capable of delivering reliable revenue and cash flow on a consistent basis,” the rating agency said.

Moody’s said that a strength of the California CCA model is the statutory provisions that enabled PCE to immediately become the default provider of generation services for San Mateo County customers of Pacific Gas and Electric Company (PG&E) upon inception. (PG&E Corporation and its primary operating subsidiary, Pacific Gas and Electric Company, on Jan. 29 filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California).

In PCE's case, all twenty of the cities in San Mateo County and the county voted affirmatively to join PCE, a credit positive.

The Baa2 rating considers the structure's “established provisions for timely, full cost recovery through an independent rate setting authority; conservative management strategy centered exclusively around serving the electric needs of its San Mateo customers; actively involved board with a broad business background; ability to secure cost competitive renewable resources; and its demonstrated ability to generate internal free cash flow on a sustained basis,” Moody’s said, adding that all of these are credit positives.

The rating agency noted that at the end of March 2019, PCE had unrestricted cash of about $108 million, an increase of $42 million from fiscal year end 2018 thanks to steady monthly internal cash flow generation. It expects to have around $125 million in cash at June 30, 2019, its fiscal year-end. “PCE's ability to generate sustained free cash flow serves to mitigate the CCA's limited three-year operating history.”

Moody’s also said that its rating recognizes the potential long-term market implications that will likely follow given PG&E's bankruptcy filing, including the current role that CCA's play in the state.

It noted that while a variety of different proposals have been discussed concerning prospective roles for PG&E, CCAs, and other government entities in the state, “our rating incorporates our understanding of the current framework for power procurement for CCA's operating in the state, particularly since we believe that the current framework is likely to remain unchanged until such time that PG&E emerges from bankruptcy, which we believe will be a several year process.”

In the meantime, Moody’s said the CCA model is a key element in the advancement of the state's objective to lower carbon emissions and transition to renewable energy sources. As a result, both state and local policymakers as well as the CPUC “are generally on the same page as to their support of and ultimate success of this model, an important consideration in our view. That said, the manner in which PG&E emerges from bankruptcy may change the role that CCAs play in the state, which could affect the direction of their credit profile prospectively.”

The rating also acknowledges the bankruptcy filing by PG&E, which acts as the billing and collection agent for northern California CCA's including PCE, along with the "first-day order" from the bankruptcy judge to maintain existing contractual and cash management arrangements between CCAs and PG&E.

Under the CCA business model, PG&E includes charges for generation services provided by PCE on the monthly electricity bill that PG&E sends to its customers.

Once a PCE customer pays its utility bill, PG&E transfers collected CCA generation revenues to PCE on a daily basis. In return for PG&E providing billing and collection services, PCE and other CCAs each pay PG&E a fee, a process that has continued while PG&E operates under receivership.

The PG&E bankruptcy court "first-day orders" included an acknowledgment that the cash flow collected by PG&E are revenues of the CCA. They are not a part of PG&E's estate and CCA revenues cannot have a lien placed against them by the debtor-in-possession lender, Moody’s said.

Moody’s issued first ever rating for CCA in 2018

Moody’s a year ago issued the first ever credit rating for a CCA, a Baa2 rating and stable outlook for California-based CCA Marin Clean Energy, saying that Marin Clean Energy has an established operating record as a California Joint Powers Authority.

The rating agency said that a “key aspect of the value proposition” offered by Marin Clean Energy and other CCAs in the state is the requirement that renewable and clean energy be a significant component of the customers' power supply mix. “This value is one of the most significant factors that provides strength to the long-term business model,” Moody’s said.

Public power utilities working with CCAs

In California, several public power utilities and entities are moving to provide services to CCAs.

In September 2017, SMUD said that it had been selected to negotiate a services agreement to provide Valley Clean Energy Alliance, a new community choice aggregation joint powers agency, with technical and energy services, data management/call center services, wholesale energy services, credit support services and up to five years of business operations support.

Meanwhile, California-based East Bay Community Energy, selected the Northern California Power Agency to provide wholesale energy services.

In November, NCPA in late 2017 said that it will be providing a variety of wholesale energy services to California’s Pioneer Community Energy.

Association offers new CCA program membership category

The American Public Power Association has initiated a new category of membership for community choice aggregation programs.