Wed 05/26/2021 18:35 PM
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Editor’s Note: Reorg's coverage of Western Community Energy is part of an expansion of our municipals-focused offerings. Please reach out to sales@reorg.com for more information.

Relevant Documents:
Petition
Press Release
Integrated Resource Plan
Financial Statements
May 24 Board Meeting Agenda

On Monday, May 24, California-based Western Community Energy, a California joint powers authority in Riverside County, commenced a chapter 9 case in the Central District of California. WCE was formed for the purpose of developing a Community Choice Aggregation, or CCA, program that purchases energy on behalf of its residents and businesses to offer a cost-competitive alternative to electricity rates. Specifically, WCE is a joint powers authority consisting of the cities of Eastvale, Hemet, Jurupa Valley, Norco, Perris and Wildomar. To read more of our Americas Municipals' coverage of the Western Community Energy chapter 9 filing as well as our coverage of other timely, objective and actionable intelligence covering higher yielding and liquid municipal issuers request a trial here.

The company reports $10 million to $50 million in assets and $50 million to $100 million in liabilities. WCE is represented by Weiland Golden Goodrich as legal counsel. The chapter 9 case has been assigned to Judge Scott H. Yun.

WCE has not yet filed its schedules of assets and liabilities. However, according to its audited financial statements for the fiscal year ended June 30, 2020, WCE had a secured credit facility in place with Barclays, comprising a $10 million letter of credit subfacility and a $6 million revolver. Although the LC subfacility has a December 2024 maturity, the revolver at that time was “anticipated to be repaid by the year 2021 and kept open until the year 2023.”

According to a staff report requesting that WCE’s board declare a fiscal emergency (attached to WCE’s May 24 board meeting agenda), as of May 19, WCE reported that it had $34,000 in its operating bank account and $5.4 million in its revenue lockbox account, which is accessible on the 20th of each month to pay creditors and mostly committed to payments to energy providers. WCE was in default on more than $12 million in payment obligations to Southern California Edison and another $5 million in payment obligations to other vendors, and owed under its credit facility $4 million in revolving advances and over $6 million in LCs.

In a press release issued in connection with the filing, WCE said it commenced the chapter 9 case to “allow for the restructuring of WCE’s financial obligations” and that “[s]everal external contributing factors have impacted WCE’s financial situation since the program was implemented at the beginning of the COVID-19 Pandemic in April 2020.” The company also notes that in August 2020, California experienced an “unprecedented” heat event, which “resulted in substantially higher power needs and a spike in the cost of energy.” WCE explains that although it had secured 90% of its electricity needs for the summer of 2020, the heat storm “exhausted the projected supplies prematurely,” and as a result, an additional $12 million in energy costs were incurred throughout the 2020 summer season due to the unanticipated warm weather.

Other factors precipitating the filing include “a tightening of the requirements of the State of California for Resource Adequacy (RA) created a shortage in the market, significantly increasing the cost of regulatory compliance” as well as the order issued by the governor of California during the Covid-19 pandemic “mandating that no customers could be disconnected due to non-payment of their utility bills.” WCE states that over the past year, “delinquencies average ten times higher than pre-Pandemic industry standards and have cost WCE millions of dollars in added cost burden.”

WCE chairman Todd Rigby says that the ongoing impacts of Covid-19 “severely limited the organization’s options moving forward and forced today’s action,” adding that chapter 9 “gives us the opportunity to restructure the organization and reorganize our finances.” The company says that it “look[s] forward to working with our legislators, the Governor, and other parties to identify a pathway forward for WCE.”

According to the WCE chapter 9 docket (available on Reorg HERE), hearings have yet to be scheduled in the case.

Board Resolutions

The WCE board of directors determined that WCE “faces an immediate and severe financial crisis and that no later than the end of May 2021, WCE will be unable to meet its financial obligations that are due or will become due,” according to the board resolutions attached to the petition. Specifically, the board finds that “without restructuring WCE's financial obligations through a Chapter 9 Bankruptcy case,” WCE “will be insolvent no later than May 30, 2021, and will not be able to pay its obligations.”

The board also determined that WCE’s fiscal emergency “jeopardizes the health, safety, and well-being of the residents who receive electrical service from WCE within its service area by potentially depriving them of an essential utility service heading into the summer months when temperatures within the inland areas spike, resulting in peak demand for electrical power,” adding that “without the protections afforded by Chapter 9 of the Bankruptcy Code, the Authority will be unable to purchase power, which would endanger the health, safety, and welfare of the customers of WCE by threatening the ability of WCE to provide utility service.”

May 24 Staff Report

According to the May 24 staff report, around the end of last year WCE began to seek “additional financing from its lender to cover some of the losses in 2020 and allow it to move forward.” The lender, however, no longer allowed WCE to draw under its existing line of credit until rate adjustments were made, “putting further pressure on WCE’s cash flow.” Moreover, February’s Storm Uri in Texas “had substantial repercussions on the electrical grid and energy prices and even had effects on the California energy market prices during the weather events,” leading to “growing concern in the California market about summer energy prices in the event of a destabilizing heat event.” Because the California Independent System Operator, or CAISO, raised the real-time market cap on energy prices to $2,000 from $1,000, WCE noted that there was a substantially increased risk and exposure to price spikes should a heat event occur.

WCE says in the May 24 report that the “final hit” came “with the release of the final Treasury Department guidelines on the use of COVID-19 American Rescue Plan funds” earlier this month. Although “the actual legislation enacted by Congress seemed to indicate that ARPA funds could be used to assist WCE,” and WCE had preliminary discussions with its members indicating that several “were amenable to using a portion of their ARPA allocation” to help finance an anticipated cash shortfall for summer 2021, the Treasury guidelines “tightened the requirements for COVID-19 relief funding, significantly limiting the portion of the contributions / loans from member entities that could be financed with these funds.”

In addition, WCE’s lender indicated it would not provide any bridge funding unless “WCE member agencies agreed to provide $25 million in financing and a guarantee of repayment of the bridge funding” - an option that, “when many local governments are still recovering from the COVID-19 pandemic,” was “untenable.”
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