Moody's assigns first-time A2 Issuer Rating to CleanPowerSF; stable outlook
Moody’s issued the following excerpted press release on December 9, 2020.
Moody's assigns first-time A2 Issuer Rating to CleanPowerSF; stable outlook
New York, December 09, 2020 -- Moody's Investors Service, has assigned a first-time A2 Issuer Rating to CleanPowerSF. The rating outlook is stable.
CleanPowerSF is a not-for-profit, single jurisdiction community choice aggregator (CCA) and a component unit of the City and County of San Francisco's Public Utilities Commission (SFPUC) , which has an extensive history of operations.
RATINGS RATIONALE
The A2 Issuer Rating for CleanPowerSF is underpinned by the strength of its service area, the CCA's ownership by the San Francisco (City & County of) CA (Aaa negative), the SFPUC's (rated Aa2 on its water and sewer system bonds) long-standing experience operating large utility enterprises with energy procurement, a common pool of experienced employees, as well as access to the unrestricted portion of the city's general fund liquidity pool in the case of an emergency.
CleanPowerSF is a single jurisdiction CCA, rather than a joint power agency (JPA) CCA. In many respects, a city-operated CCA is similar to CCAs operated by JPAs in expanding clean energy choices. Strengths of city-operated CCAs include: governance and ownership by the city, linkage to the city's oversight, with city councils having authority over the unregulated rate-setting process, and experience managing other services such as water and sewer. Challenges faced by a single jurisdiction CCA include potential political pressure should rates need to be increased; and not unlike JPA CCAs, a largely untested business model.
Another differentiating factor between a city-operated CCA such as CleanPowerSF and a JPA CCA is that in the event a city-operated CCA were to terminate its program, cost recovery of any power-related obligation or other costs would remain the responsibility of the city payable from CCA rate revenues. While not court-tested, we think the City obligation is similar to the well-established security afforded to other city-operated enterprises for their obligations. However, CCA obligations are not general obligations of the city. Whether the City of San Francisco would provide implicit support from the general government financial liquidity and or other sources and not just from CleanPowerSF in the event of a program termination is uncertain. That said, CleanPowerSF's legal relationship with the City of San Francisco is identical to the City's other enterprises, and we view the business activities at CleanPowerSF as being strategically important to the City from a policy and environmental perspective. In contrast, the JPA CCA business model is explicit about how such obligations will be handled. Specifically, in JPA agreements, there is explicit authority that a city that terminates their relationship with the JPA CCA must pay off any obligation taken out on their behalf. However, this also remains untested, and a city would only be obliged in the event it chooses to terminate such an agreement.
Despite the very strong socio-economic conditions of CleanPowerSF's service area, a core underpinning of the CleanPowerSF's credit profile, the service territory does include a large commercial customer segment making CleanPowerSF disproportionally negatively impacted by the Shelter in Place (SIP) measures associated with COVID 19. From March - September 2020, total load demand was 8.7% below expectations as per CleanPowerSF's pre-COVID forecast. The biggest impact to lower total demand has come from the commercial load decline which dropped 19.2% compared to CleanPowerSF's pre-COVID forecast. Positively, residential load has been 9.8% above the baseline forecast helping to mitigate the overall net demand decline due to coronavirus.
CleanPowerSF anticipates that demand recovery of up to 95% of pre-COVID levels will be reached in FY 2022, as it has conservatively assumed a slow recovery along with the possibility of an additional wave of cases occurring before a vaccine is broadly implemented. CleanPowerSF expects to maintain adequate levels of liquidity strengthening from the current level of 150 days cash of hand (DCOH) to over 200 DCOH in 2025, averaging 275 DCOH from 2025-2029, while meeting its internal target of three months' operating expenses and 15% of trailing twelve months revenue. The base case also includes CleanPowerSF funding around $72 million of capital investments from internal sources during this timeframe. Under a Moody's Base Case where revenues grow at a slightly lower rate relative to management's projections, DCOH settles at an average of 237 days from 2025-2029.
Over the next few years, CleanPowerSF will have less flexibility to generate excess cash to add to reserves, owing to the above mentioned load demand decline and anticipated slower economic recovery, along with large Power Cost Indifference Adjustment (PCIA) fee increases expected in 2021 that will need to be absorbed by CleanPowerSF and its customers. Total energy supply costs will increase due to anticipated increases in other supply costs (CAISO grid charges, Resource Adequacy capacity costs, short-term renewable energy and greenhouse gas free attribute costs, scheduling coordinator fees, and budget contingency 5%) which are offset in part by lower costs from long-term power purchase agreements (PPAs). Overall, it is anticipated that CleanPowerSF's supply costs will moderately increase every year through 2030, averaging a yearly increase of 2.7% from 2021-2030. In a Moody's sensitized case where revenues grow at a slightly lower rate after FY 2023, net revenues would average $17.9 million per year from FY 2024-FY 2030, compared to an average of $25.7 million per year in management's case. This difference would amount to a difference of $45 million less net revenues under Moody's Case over the 2024-2030 period.
To help mitigate against weaker financial performance in any given year, CleanPowerSF can draw from reserves to stabilize rates and maintain rate competitiveness. Additionally, CleanPowerSF has the authority to independently establish rates and charges, which they review rates regularly, making adjustments to maintain competitiveness and recover costs as needed. While CleanPowerSF's objective is to provide its customers with stable, cost-based and competitive rates, it does not have a policy to always have rates that are below those of Pacific Gas and Electric (PG&E), as some other CCAs do. We view this strategy to be credit positive. We recognize that maintaining rates above PG&E could pose the biggest risk for commercial customers, who tend to be more price sensitive compared to residential customers. As a CCA with a large commercial concentration, we note that it will be key for CleanPowerSF to maintain rate competitiveness within this customer class. We note that CleanPowerSF rates became temporarily more expensive than PG&E's in early 2016, and the CCA reports that no material impact on opt-out rates, a credit positive.
Another key strength for CleanPowerSF's credit quality and liquidity profile is its access to the City of San Francisco's Treasury pool, which provides additional liquidity to CleanPowerSF. As of Q1 2020, the City's pool was made up of approximately $11.2 billion in unrestricted cash, of which $1.2 billion is reserved for the benefit of SFPUC enterprise funds (including $98.3 million for CleanPowerSF). While use of this cash accrues interest, a negative cash balance is not considered to be a debt obligation that would be ranked senior, parity, or subordinate to any external debt of an enterprise. Access to this unrestricted cash from the City is not counted towards Moody's calculated adjusted DCOH, however, it is viewed to be a credit positive qualitative factor that strengthens CleanPowerSF's credit quality and liquidity profile. While not including these resources in our liquidity analysis, CleanPowerSF's Issuer Rating benefits from its ability to access this liquidity, if needed, particularly for an enterprise operating in the power procurement business selling intermittent resources where access to substantial liquidity is a key mitigant to the volatility that can accompany this business model. This liquidity is a key strength compared to JPA-structured CCA peers, which do not have access to a city's cash pool.
The A2 Issuer Rating acknowledges CleanPowerSF's business risk which can lead to cash flow volatility from power procurement particularly given the intermittent nature of the resource. CleanPower's manages this risk through a layered hedging strategy centered around maintaining a net open position. Additional comfort is gained by management's experience operating a utility system, that includes power procurement activities for more than 80 years and by the size of the liquidity resources available to CleanPowerSF which help to backstop their relative position if needed. The Issuer Rating incorporates a view that the challenges facing CCAs, including CleanPowerSF, regarding the PCIA charge which we maintain remains a medium term issue that should ultimately be addressed in subsequent regulatory hearings at the California Public Utilities Commission (CPUC) or through future legislative action, and will in the future decline, as higher-priced legacy contracts at PG&E expire.
As discussed, CleanPowerSF has a high share of commercial and industrial load and revenues, at around 58% of the total, a credit negative. One weakness of the material concentration in commercial and industrial customers is that it leaves CleanPowerSF more exposed to potential Direct Access (DA) risk. CleanPowerSF has assumed a 2-3% load departure from DA in its 10-year forecast. 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 an incremental risk to CCAs in general, and in particular to CleanPowerSF, given the characteristics of its service territory.
The legislation enabling CCAs in CA has an opt-out provision, meaning that all customers within CleanPowerSF'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, PG&E. Opt-out rates have remained low for rated California CCAs, and CleanPowerSF has experienced an opt-out rate of 3.9% as of September 2020. CleanPowerSF's limited service territory within the city of San Francisco also helps with the management of power procurement.
The A2 issuer rating further considers CleanPowerSF's limited operating history, and the lack of tested regulations for California CCAs. While CleanPowerSF began in 2016, FY 2020 represents CleanPowerSF's first year of full operations with service now reaching all of its intended customers. That said, this risk is offset by the experience within the city operating utility enterprises. We beieve CleanPowerSF's credit profile could strengthen with an operating track record that meets financial and operational performance expectations over the next few years, including the strengthening of liquidity. Further, notwithstanding the current economic challenges arising from the coronavirus, we recognize that the CA CCA model is relatively young, has not gone through different economic cycles, and is still susceptible to changes in the California energy market with respect to resource adequacy requirements, PCIA and DA.
RATING OUTLOOK
The stable outlook reflects expectations that CleanPowerSF 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 CleanPowerSF's economic service territory will remain strong and supportive of a clean energy value proposition offered by CleanPowerSF through the CCA model for customers in San Francisco.
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Clean Energy Capital serves as Financial Advisor to CleanPowerSF.