Staff Report Item 13
TO: East Bay Community Energy Board of Directors
FROM: Howard Chang, COO & Treasurer
SUBJECT: Credit Rating Review (Informational Item)
DATE: January 19, 2022
__________________________________________________________________ Recommendation
Receive the review of the credit rating and its implications to EBCE operations.
Background and Discussion
On December 9, 2021 EBCE received a grade of “A/Stable” credit rating by S&P Global Ratings.
This rating was based on several aspects of EBCE’s enterprise operations as it relates to various aspects of risk. The following is a summary of the strengths listed by S&P in the report:
• Deep customer base of 640,000 accounts with residential customers responsible for almost half of the load which gives EBCE large economies of scale, and a less than 5% opt out rate shows community support of value proposition • Protective joint powers agreement with the jurisdictional members • Diverse power supply arrangements
• Solid financial performance with an expectation of considerable liquidity increase in the coming years
• Limited direct exposure to local wildfire hazards
These strengths were considered partly offset by the following challenges:
• Direct retail competition with PG&E, which can limit rate-setting • Volatile load profile and fulfilling renewable energy balancing mandates • Exposure to PCIA
• Open position exposure to market purchases
• Still developing reserves and in a marginally tight current year of operations The conclusions in the report were based upon data submitted to S&P and a staff presentation given to the rating analysts on Oct 22, 2021.
The presentation included a summary of EBCE’s historical financial performance and strong five-year projections based on some essential assumptions; primarily in areas of PCIA, rates, established power purchase agreements, and expected forward costs of energy prices. The fundamental predication being on EBCE’s net liquidity metrics.
For S&P, the basis of the stable rating is EBCE’s ability to generate and retain substantial cost coverage by holding high levels of cash and equivalents, which allows the organization to remain competitive with PG&E.
It is important to note, by our current reserve policy (Policy P-10.1) liquidity and reserves are not exactly the same in this case. Liquidity reflects available cash and represents the organization’s ability to absorb cost or operational shocks, whereas reserves is a subset of cash held to be untouched except in extreme circumstances and with Board permission. Because it is difficult to forecast future Reserves, the provided forecasts assume all incremental net position contributes to liquidity and is allocated to Reserves. The graph below shows net position and reserves both increasing in future years.
Based on the above tables, and as of July 1, 2021, EBCE’s days liquidity on hand could cover approximately 137 days of operation based on net position and GASB 62 revenues. EBCE’s Formal Reserve Policy states a target of 50% with a range of 25-75%.
In addition to our cash/reserve position, our credit facility with Barclays Bank, LLC provides an additional 45 days of operating liquidity, should it be required. The facility is sized at $80MM with up to $60MM for cash and $35MM for LOCs. Additionally EBCE noted two potential working capital changes: Evaluating financing of the new office building purchase with low-cost financing through a lease leaseback structure and a planned RFP for new bank credit line in early 2022 to further improve credit terms and consider upsizing.
Fiscal Impact
This report is expected to have no fiscal impact on EBCE operations Attachments
A. S&P Global Ratings Direct Report for EBCE