Pursuant to the Americans with Disabilities Act, if you need special assistance in this meeting, please contact the Clerk for the Authority at (408) 721-5301 x1005. Notification 48 hours prior to the meeting will enable the Authority to make reasonable arrangements to ensure accessibility to this meeting. (28 CFR 35.105 ADA Title II).
Margaret Abe-Koga, Chair
City of Mountain View
Liz Gibbons, Vice Chair
City of Campbell
Jon Willey
City of Cupertino
Zach Hilton
City of Gilroy
Neysa Fligor
City of Los Altos
George Tyson
Town of Los Altos Hills
Rob Rennie
Town of Los Gatos
Evelyn Chua
City of Milpitas
Javed Ellahie
City of Monte Sereno
Yvonne Martinez Beltran
City of Morgan Hill
Tina Walia
City of Saratoga
Gustav Larsson
City of Sunnyvale
Susan Ellenberg
County of Santa Clara
svcleanenergy.org
333 W El Camino Real
Suite 330
Sunnyvale, CA 94087
Silicon Valley Clean Energy
Finance and Administration Committee Meeting
Thursday, May 26, 2022
3:30 pm
Teleconference Meeting
Webinar:
https://svcleanenergy-org.zoom.us/j/87647599776
Or by Telephone (Audio only):
US: +1 669 219-2599
Webinar ID: 876 4759 9776
This meeting will be conducted in accordance with California Government Code Section 54953(e), in consideration of the Coronavirus (COVID-19). All members of the Silicon Valley Clean Energy Finance and Administration Committee and staff will participate in this meeting by teleconference.
Members of the public may observe this meeting electronically by accessing the meeting via instructions above. Public Comments can be sent in advance of the meeting to Board Clerk Andrea Pizano at [email protected] and will be read within the public comment period or the applicable agenda item. The public will also have an opportunity to provide comments during the meeting. Members of the public using Zoom may comment during public comment or the applicable agenda item by using the Raise Hand feature and you will be recognized by the Chair. Those using the telephone (audio only) feature should press star 9 on your phones to initiate the “Raise Hand” function in Zoom. You will then be announced, unmuted, and your time to speak will begin.
The public may provide comments on any matter listed on the Agenda. Speakers are customarily limited to 3 minutes each, however, the Committee Chair may increase or decrease the time allotted to each speaker based on the number of speakers, the length of the agenda and the complexity of the subject matter. Speaking time will not be decreased to less than one minute.
If you are an individual with a disability and need a reasonable modification or accommodation pursuant to the Americans with Disabilities Act (“ADA”) please contact Board Clerk Andrea Pizano at [email protected] prior to the meeting for assistance.
AGENDA
Call to Order
Roll Call
Public Comment on Matters Not Listed on the Agenda
Pursuant to the Americans with Disabilities Act, if you need special assistance in this meeting, please contact the Clerk for the Authority at (408) 721-5301 x1005. Notification 48 hours prior to the meeting will enable the Authority to make reasonable arrangements to ensure accessibility to this meeting. (28 CFR 35.105 ADA Title II).
Margaret Abe-Koga, Chair
City of Mountain View
Liz Gibbons, Vice Chair
City of Campbell
Jon Willey
City of Cupertino
Zach Hilton
City of Gilroy
Neysa Fligor
City of Los Altos
George Tyson
Town of Los Altos Hills
Rob Rennie
Town of Los Gatos
Evelyn Chua
City of Milpitas
Javed Ellahie
City of Monte Sereno
Yvonne Martinez Beltran
City of Morgan Hill
Tina Walia
City of Saratoga
Gustav Larsson
City of Sunnyvale
Susan Ellenberg
County of Santa Clara
svcleanenergy.org
333 W El Camino Real
Suite 330
Sunnyvale, CA 94087
The public may provide comments on any matter not listed on the Agenda provided that it is within the subject matter jurisdiction of SVCE. Speakers are customarily limited to 3 minutes each, however, the Committee Chair may increase or decrease the time allotted to each speaker based on the number of speakers, the length of the agenda and the complexity of the subject matter. Speaking time will not be decreased to less than one minute.
Consent Calendar (Action)
1a) Approve Minutes of the December 16, 2021 Finance and Administration Committee Meeting
1b) Approve Direction to Staff to Poll Committee Members for Next Meeting Date Regular Calendar
2) Selection of 2022 SVCE Finance and Administration Committee Chair and Vice Chair (Action)
3) SVCE Investment Policy Update (Discussion)
4) Results of the Stress Test Analyses (Discussion)
Committee/Staff Remarks
Public Comment on Closed Session
The public may provide comments regarding the Closed Session item(s) just prior to the Committee beginning the Closed Session. Closed Sessions are not open to the public.
Convene to Closed Session
THREAT TO PUBLIC SERVICES OR FACILITIES
Consultation with: Amrit Singh, Chief Financial Officer and Director of Administrative Services, Kevin Armstrong, Deputy Director of Administrative Services Report from Closed Session
Adjourn
Margaret Abe-Koga, Chair
City of Mountain View
Liz Gibbons, Vice Chair
City of Campbell
Jon Robert Willey
City of Cupertino
Zach Hilton
City of Gilroy
Neysa Fligor
City of Los Altos
George Tyson
Town of Los Altos Hills
Rob Rennie
Town of Los Gatos
Evelyn Chua
City of Milpitas
Javed Ellahie
City of Monte Sereno
Yvonne Martinez Beltran
City of Morgan Hill
Tina Walia
City of Saratoga
Gustav Larsson
City of Sunnyvale
Susan Ellenberg
County of Santa Clara
svcleanenergy.org
333 W El Camino Real
Suite 330
Sunnyvale, CA 94087
Silicon Valley Clean Energy
Finance and Administration Committee Meeting
Thursday, December 16, 2021
10:00 a.m.
Pursuant to State of California Gov’t Code Section 54953 (e) the meeting was conducted via teleconference.
DRAFT MINUTES
Call to Order
Chair Rennie called the meeting to order at 10:00 a.m.
Roll Call
Present:
Chair Rob Rennie, Town of Los Gatos
Vice Chair Bryan Mekechuk, City of Monte Sereno
Director Liz Gibbons, City of Campbell
Director Yvonne Martinez Beltran, City of Morgan Hill
Alternate Director Larry Klein, City of Sunnyvale
Absent:
None.
All committee members participated via teleconference.
Vice Chair Mekechuk welcomed Board Clerk Andrea Pizano back from maternity leave.
Public Comment on Matters Not Listed on the Agenda
No speakers.
Consent Calendar
MOTION: Alternate Director Klein moved and Vice Chair Mekechuk seconded the motion to approve the Consent Calendar.
Chair Rennie opened public comment.
No speakers.
Chair Rennie closed public comment.
The motion carried unanimously by verbal roll call vote.
Item 1a 1 Draft Minutes, Dec. 16, 2021 Finance and Admin Committee Meeting r ~'\ SILICON VALLEY ~ CLEAN ENERGY
Margaret Abe-Koga, Chair
City of Mountain View
Liz Gibbons, Vice Chair
City of Campbell
Jon Robert Willey
City of Cupertino
Zach Hilton
City of Gilroy
Neysa Fligor
City of Los Altos
George Tyson
Town of Los Altos Hills
Rob Rennie
Town of Los Gatos
Evelyn Chua
City of Milpitas
Javed Ellahie
City of Monte Sereno
Yvonne Martinez Beltran
City of Morgan Hill
Tina Walia
City of Saratoga
Gustav Larsson
City of Sunnyvale
Susan Ellenberg
County of Santa Clara
svcleanenergy.org
333 W El Camino Real
Suite 330
Sunnyvale, CA 94087
1a) Approve Minutes of the August 2, 2021 Finance and Administration Committee Meeting
1b) Approve Minutes of the November 29, 2021 Finance and Administration Committee Special Meeting
Regular Calendar
2) CEO Update (Discussion)
CEO Balachandran announced the PG&E rate change was expected to take effect March 1, 2022, and noted Staff would update members in the new year as more information was received.
Chair Rennie opened public comment.
No speakers.
Chair Rennie closed public comment.
3) Updating SVCE’s Investment Policy and Considering Hiring an Investment Portfolio Manager (Discussion)
Amrit Singh, CFO and Director of Administrative Services, introduced the item and Jim Steele, Special Advisor with Management Partners. CFO and Director of Administrative Services Singh commented SVCE contracted with Management Partners to assist with SVCE’s internal controls and policies, as well as to think through SVCE’s investment strategy.
Mr. Steele presented a PowerPoint presentation which addressed SVCE’s current investment practices, information on the California Government Code on investments, best practices, information on the Request for Proposal (RFP) which was developed and distributed with SVCE, and proposed next steps which included entering into contract discussions with one of the respondents to assist SVCE staff in developing an investment policy consistent with an appropriate risk profile.
Staff and Mr. Steele responded to committee member questions; Mr. Steele confirmed with Vice Chair Mekechuk that Management Partners developed an RFP on behalf of SVCE.
CFO and Director of Administrative Services Singh noted the item was for the committee’s awareness, to incorporate feedback, and there would be future engagement with the committee and the SVCE Board of Directors.
Alternate Director Klein noted the importance of being clear about the exit strategy. 4) Review of SVCE’s First Prepay Transaction (Discussion) Chair Rennie announced he and Vice Chair Mekechuk would need to leave prior to and shortly after the start of Item 4 and requested Director Gibbons preside over the remainder of the meeting in their absence; Director Gibbons agreed.
Vice Chair Mekechuk left the meeting at 10:43 a.m.; Chair Rennie left the meeting at 10:46 a.m.
Item 1a 2 Draft Minutes, Dec. 16, 2021 Finance and Admin Committee Meeting r ~'\ SILICON VALLEY ~ CLEAN ENERGY
Margaret Abe-Koga, Chair
City of Mountain View
Liz Gibbons, Vice Chair
City of Campbell
Jon Robert Willey
City of Cupertino
Zach Hilton
City of Gilroy
Neysa Fligor
City of Los Altos
George Tyson
Town of Los Altos Hills
Rob Rennie
Town of Los Gatos
Evelyn Chua
City of Milpitas
Javed Ellahie
City of Monte Sereno
Yvonne Martinez Beltran
City of Morgan Hill
Tina Walia
City of Saratoga
Gustav Larsson
City of Sunnyvale
Susan Ellenberg
County of Santa Clara
svcleanenergy.org
333 W El Camino Real
Suite 330
Sunnyvale, CA 94087
CFO and Director of Administrative Services Singh presented a PowerPoint presentation on a review of the completed prepay transaction which included a timeline, goals of the prepay, board authorized execution parameters, summary of executed transactions, cost of issuance, and next steps.
CFO and Director of Administrative Service Singh responded to committee member questions.
Director Gibbons opened public comment.
No speakers.
Director Gibbons closed public comment.
Committee/Staff Remarks
CEO Balachandran noted elections for Chair/Vice Chair of the Board of Directors would take place in January, and elections for the Finance and Administration Committee would take place in February.
Adjournment
Director Gibbons adjourned the meeting at 11:01 a.m.
Item 1a 3 Draft Minutes, Dec. 16, 2021 Finance and Admin Committee Meeting r ~'\ SILICON VALLEY ~ CLEAN ENERGY
Staff Report – Item 1b
Item 1b: Direction to Staff to Poll Committee Members for Next Meeting Date From: Monica Padilla, COO
Prepared by: Andrea Pizano, Board Clerk/Executive Assistant Date: 5/26/2022
RECOMMENDATION
Direct staff to distribute a poll for availability for the next meeting(s) of the Finance and Administration Committee.
BACKGROUND
Per SVCE’s policy FP1-B, Establish Finance and Administration Committee, the Finance and Administration Committee shall meet as often as it determines as necessary or appropriate to fulfill its responsibilities, but no fewer than quarterly. Responsibilities include developing an annual operating budget with staff, monitor adherence to the budget, ensure approved financial policies and procedures are being followed, and review the investment policy annually and update if necessary.
ANALYSIS & DISCUSSION
Rather than take time during the meeting to identify an ideal meeting date and time, staff is requesting direction from the committee to distribute a poll to determine availability of members and schedule the next meeting date.
STRATEGIC PLAN
N/A
ALTERNATIVE
An alternative to distributing a poll for availability would be to discuss among the committee and identify a meeting date during the May 26, 2022 meeting.
FISCAL IMPACT
No fiscal impact from the selection of the next meeting date.
Item 1b
/ A"\ SILICON VALLEY
~CLEAN ENERGY
Staff Report – Item 2
Item 2: Selection of 2022 SVCE Finance and Administration Committee Chair and Vice Chair From: Monica Padilla, COO
Prepared by: Andrea Pizano, Board Clerk/Executive Assistant Date: 5/26/2022
RECOMMENDATION
Establish a Chair and Vice Chair of the Finance and Administration Committee to preside over Committee meetings.
BACKGROUND
At the February 14, 2018 SVCE Board of Directors meeting, the Board approved the formation of an Finance and Administration Committee, consistent with Board Policy FP1-B, Establish Finance and Administration Committee.
ANALYSIS & DISCUSSION
As a permanent standing committee of the Board of Directors, the Finance and Administration Committee is subject to the Brown Act for all meetings. In order to provide for efficient and reliable Committee meeting organization, Staff recommends the Committee appoint a Chair to preside over its meetings, and a Vice Chair to act in the absence of the Chair. The last Chair and Vice Chair of the committee were selected at the March 23, 2021 meeting (Director Rob Rennie and Alternate Director Bryan Mekechuk, respectively).
Since 2022 committee membership was ratified at the February Board of Directors meeting and new members have joined, this committee is in need of a new Chair and Vice Chair.
STRATEGIC PLAN
N/A
ALTERNATIVE
Staff is open to any suggestions from the committee on selection of the Chair and/or Vice Chair.
FISCAL IMPACT
No fiscal impact from the selection of a Chair and Vice Chair of the committee.
Item 2
/ A"\ SILICON VALLEY
~CLEAN ENERGY
Staff Report – Item 3
Item 3: SVCE Investment Policy Update
From: Monica Padilla, COO
Prepared by: Amrit Singh, CFO and Director of Administrative Services Date: 5/26/2022
RECOMMENDATION
Staff is requesting the Committee receive a presentation from PFM Asset Management on updating SVCE’s investment policy and cash investment strategy.
BACKGROUND
At the December 2021 meeting, the Committee received a presentation from consultant Jim Steele of Management Partners with recommended next steps to engage in contract negotiations with a vendor to assist in the development of an amended investment policy.
ANALYSIS & DISCUSSION
Since then, Staff and Management Partners have been working with PFM Asset Management to finalize an agreement. In the form of a presentation to the Committee, PFM AM will describe their process in engaging with Staff, the Committee and the Board to update SVCE’s investment Policy and develop an investment strategy.
STRATEGIC PLAN
The recommendations support SVCE Strategic Plan Goal 13 – “Commit to maintaining a strong financial position”.
ALTERNATIVE
N/A
FISCAL IMPACT
N/A
ATTACHMENT
1. PFM Asset Management Glossary
The presentation for this item is posted to SVCE’s website.
Item 3
/ A"\ SILICON VALLEY
~CLEAN ENERGY
GLOSSARY
ACCRUED INTEREST: Coupon interest accumulated on a bond or note since the last interest payment or, for a new issue, from the dated date to the date of delivery.
ANNUAL COMPREHENSIVE FINANCIAL REPORT (ACFR): The official annual report of the (entity). It includes five combined statements for each individual fund and account group prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance-related legal and contractual provisions, extensive introductory material, and a detailed Statistical Section.
ASSET-BACKED SECURITIES: Securities that are supported by pools of assets, such as installment loans or leases, or by pools of revolving lines of credits. Asset-backed securities are structured as trusts in order to perfect a security interest in the underlying assets.
ASKED: The price at which securities are offered.
BANKERS’ ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer.
BASIS POINTS: Refers to the yield on bonds. Each percentage point of yield in bonds equals 100 basis points (1/100% or 0.01%). If a bond yield changes from 2.25% to 2.39%, that is a rate of 14 basis points.
BENCHMARK: A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio’s investments.
BID: The price offered by a buyer of securities. (When you are selling securities, you ask for a bid.) See Offer.
BOOK RETURN: Book return includes interest, amortization/accretion of premiums/discounts, realized gains and losses, over a given period of time.
BOOK VALUE: The value at which an asset is carried on a balance sheet.
BROKER: A broker brings buyers and sellers together for a commission.
CALLABLE SECURITIES: An investment security that contains an option allowing the issuer to retire the security prior to its final maturity date.
CERTIFICATE OF DEPOSIT: A short-term, secured deposit in a financial institution that usually returns principal and interest to the lender at the end of the loan period. Certificates of Deposit (CDs) differ in terms of collateralization and marketability. Those appropriate to public agency investing include:
Negotiable Certificates of Deposit
Generally, short-term debt instrument that usually pays interest and is issued by a bank, savings or federal association, state or federal credit union, or state-licensed branch of a foreign bank. The majority of negotiable CDs mature within six months while the average maturity is two weeks. Negotiable CDs are traded in a secondary market and are payable upon order to the bearer or initial depositor (investor). Negotiable CDs are insured by FDIC up to $250,000, but they are not collateralized beyond that amount.
Non-Negotiable Certificates of Deposit
CDs that carry a penalty if redeemed prior to maturity. A secondary market does exist for non-negotiable CDs, but redemption includes a transaction cost that reduces returns to the investor. Non-negotiable CDs issued by banks and savings and loans are insured by the Federal Deposit Insurance Corporation up to the amount of Item 3
Attachment 1
1 PFM Asset Management Glossary
$250,000, including principal and interest. Amounts deposited above this amount may be secured with other forms of collateral through an agreement between the investor and the issuer. Collateral may include other securities including Treasuries or agency securities such as those issued by the Federal National Mortgage Association.
COLLATERAL: Securities, evidence of deposit or other property, which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies.
COMMERCIAL PAPER: An unsecured short-term promissory note issued by corporations or municipalities, with maturities ranging from 2 to 270 days.
COUPON: (a) The annual rate of interest that a bond’s issuer promises to pay the bondholder on the bond’s face value. (b) A certificate attached to a bond evidencing interest due on a payment date.
CREDIT RISK: The chance that an issuer will be unable to make scheduled payments of interest and principal on an outstanding obligation. Another concern for investors is that the market’s perception of an issuer/borrower’s credit will cause the market value of a security to fall, even if default is not expected.
DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account.
DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery versus payment and delivery versus receipt. Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities.
DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities).
DISCOUNT: The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount.
DISCOUNT SECURITIES: Noninterest-bearing money market instruments that are issued a discount and redeemed at maturity for full face value (e.g., U.S. Treasury Bills.) DIVERSIFICATION: The allocation of different types of assets in a portfolio to mitigate risks and improve overall portfolio performance.
DURATION: A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.
EFFECTIVE DURATION: Duration measures the weighted average of the present value of the cash flows of a fixed-income investment. Effective duration measures the price sensitivity of fixed-income investments, especially for those with embedded option features such as call options. As yields rise, the effective duration of a callable investment rises to reflect the fact that it has become less likely to be called. The more rates rise, the longer the effective duration will become, approaching the duration to maturity. The converse is true in a declining interest rate environment (that is, the more rates fall, the shorter the effective duration will become, approaching the duration to call). For securities without an embedded option, the duration to call, maturity, and effective duration are all the same. The calculation for effective duration is complicated and involves averaging the duration under a simulation of many possible interest rate scenarios in the future.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, Item 3
Attachment 1
2 PFM Asset Management Glossary
currently up to $250,000 per entity.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations.
GOVERNMENT ACCOUNTING STANDARDS BOARD (GASB): A standard-setting body, associated with the Financial Accounting Foundation, which prescribes standard accounting practices for governmental units.
GOVERNMENT SPONSORED ENTERPRISES (GSE): Privately held corporations with public purposes created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy.
Securities issued by GSEs carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government. For this reason, these securities will offer a yield premium over Treasuries.
INTEREST: The amount a borrower pays to a lender for the use of his or her money.
INTEREST RATE RISK: Interest rate risk is the risk that an investment's value will change due to a change in the absolute level of interest rates, spread between two rates, shape of the yield curve, or any other interest rate relationship.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes.
LOCAL AGENCY INVESTMENT FUND: A voluntary investment fund open to government entities and certain non-profit organizations in California that is managed by the State Treasurer’s Office.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment.
MARKET RISK: The chance that the value of a security will decline as interest rates rise. In general, as interest rates fall, prices of fixed income securities rise. Similarly, as interest rates rise, prices fall. Market risk also is referred to as systematic risk or risk that affects all securities within an asset class similarly.
MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase—reverse repurchase agreements that establishes each party’s rights in the transactions.
A master agreement will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller borrower.
MATURITY: The date upon which the principal or stated value of an investment becomes due and payable.
MEDIUM TERM NOTES: Corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States.
MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper, bankers’ acceptances, etc.) are issued and traded.
MONEY MARKET MUTUAL FUNDS: MMF’s are mutual funds that invest exclusively in short-term money market instruments. MMF’s seek the preservation of capital as a primary goal while maintaining a high degree of liquidity and providing income representative of the market for short-term investments.
MORTGAGE BACKED SECURITIES: Mortgage-backed securities (MBS) are created when a mortgagee or a purchaser of residential real estate mortgages creates a pool of mortgages and markets undivided interests or participations in the pool. MBS owners receive a prorata share of the interest and principal cash flows (net of fees) that are “passed through” from the pool of mortgages. MBS are complex securities whose cash flow is determined by the characteristics of the mortgages that are pooled together. Investors in MBS face prepayment risk associated with the option of the underlying mortgagors to pre-pay or payoff their mortgage. Most MBS are issued and/or guaranteed by federal agencies and instrumentalities (e.g., Item 3
Attachment 1
3 PFM Asset Management Glossary
Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), and Federal Home Loan Mortgage Corporation (FHLMC)).
MORTGAGE PASS-THROUGH OBLIGATIONS: Securities that are created when residential mortgages (or other mortgages) are pooled together and undivided interests or participations in the stream of revenues associated with the mortgages are sold.
MUNICIPAL NOTES, BONDS, AND OTHER OBLIGATIONS: Obligations issued by state and local governments to finance capital and operating expenses.
NET ASSET VALUE: Net asset value (NAV) is a term used in the mutual fund industry to determine the average price per share of a pool or mutual fund. How this measure varies over time provides information on whether the pool is stable or variable. NAV is the market value of all securities in a mutual fund, less the value of the fund’s liabilities, divided by the number of shares in the fund outstanding. Shares of mutual funds are purchased at the fund’s offered NAV.
OFFER: The price asked by a seller of securities. (When you are buying securities, you ask for an offer.) See Asked and Bid.
PAR AMOUNT OR PAR VALUE: The principal amount of a note or bond which must be paid at maturity. Par, also referred to as the “face amount” of a security, is the principal value stated on the face of the security. A par bond is one sold at a price of 100 percent of its principal amount.
PORTFOLIO: Combined holding of more than one stock, bond, commodity, real estate investment, cash equivalent, or other asset. The purpose of a portfolio is to reduce risk by diversification.
PRIMARY DEALER: A group of government securities dealers who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC)-registered securities broker-dealers, banks, and a few unregulated firms.
PRUDENT INVESTOR STANDARD: A standard of conduct where a person acts with care, skill, prudence, and diligence when investing, re-investing, purchasing, acquiring, exchanging, selling, and managing funds. The test of whether the standard is being met is if a prudent person acting in such a situation would engage in similar conduct to ensure that investments safeguard principal and maintain liquidity.
PUBLIC BANK: A corporation, organized as either a nonprofit mutual benefit corporation or a nonprofit public benefit corporation for the purpose of engaging in the commercial banking business or industrial banking business, that is wholly owned by a local agency, as specified, local agencies, or a joint powers authority.
QUALIFIED INSTITUTIONAL BUYER: Federal regulations define qualified institutional buyer (QIB) as any of the following entities, acting for its own account or the accounts of other QIBs, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity:
insurance company, investment company, small business investment company, a Rural Business Investment Company, a plan (established and maintained by a public agency) for the benefit of its employees, employee benefit plan, trust fund (bank or trust company), business development company, 501(c)(3), investment adviser, and dealer, an institution that qualifies as an accredited investor. 17 CFR § 230.144A and 230.145 RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond the current income return.
REINVESTMENT RISK: The risk that interest rates may be lower than the yield on a fixed income security when the investor seeks to reinvest interest income or repaid principal from the security.
REPURCHASE AGREEMENT (REPO): A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security “buyer” in effect lends the “seller” money for the period of the agreement, and the terms of the agreement are structured to compensate them for this.
Item 3
Attachment 1
4 PFM Asset Management Glossary
REVERSE REPURCHASE AGREEMENT (REVERSE REPO): A reverse-repurchase agreement (reverse repo) involves an investor borrowing cash from a financial institution in exchange for securities. The investor agrees to repurchase the securities at a specified date for the same cash value plus an agreed upon interest rate. Although the transaction is similar to a repo, the purpose of entering into a reverse repo is quite different.
While a repo is a straightforward investment of public funds, the reverse repo is a borrowing.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank’s vaults for protection.
SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution.
SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation.
SEC RULE 15C3-1: See Uniform Net Capital Rule.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB, FNMA, FHLMC, etc.) and Corporations, which have imbedded options (e.g., call features, step-up coupons, floating rate coupons, derivative-based returns) into their debt structure. Their market performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options and shifts in the shape of the yield curve.
SUPRANATIONAL INSTITUTIONS: International institutions formed by two or more governments that transcend boundaries to pursue mutually beneficial economic or social goals. There are three supranational institutions that issue obligations that are eligible investments for California local agencies: the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), and Inter-American Development Bank (IADB).
TOTAL RETURN: Total return includes interest, realized gains and losses, and unrealized gains and losses over a given period of time.
U.S. TREASURY OBLIGATIONS: Debt obligations of the U.S. Government sold by the Treasury Department in the forms of bills, notes, and bonds. Bills are short-term obligations that mature in one year or less and are sold at a discount. Notes are obligations that mature between one year and ten years. Bonds are long-term obligations that generally mature in ten years or more.
WEIGHTED AVERAGE MATURITY (WAM): The average maturity of all the securities that comprise a portfolio, typically expressed in days or years.
YIELD: The rate of annual income return on an investment, expressed as a percentage. (a) INCOME YIELD is obtained by dividing the current dollar income by the current market price for the security. (b) NET YIELD or YIELD TO MATURITY is the current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond.
ZERO-COUPON BOND: A bond on which interest is not payable until maturity (or earlier redemption), but compounds periodically to accumulate to a stated maturity amount. Zero-interest bonds are typically issued at a discount and repaid at par upon maturity.
Item 3
Attachment 1
5 PFM Asset Management Glossary
Staff Report – Item 4
Item 6: Results of the Stress Test Analyses
From: Monica Padilla, COO
Prepared by: Amrit Singh, CFO and Director of Administrative Services Karthik Rajan, Senior Risk Manager
Date: 5/26/2022
RECOMMENDATION
Receive and discuss the results of the Stress Test analyses.
BACKGROUND
Staff conducted stress tests to assess the critical risks facing the organization that can threaten its viability to carry its mission. The stress test scenarios, also often referred to as Black Swan events in risk terminology, are extreme but plausible events that if occurred could have severe adverse effects on the organization.
In constructing the stress test scenarios, cross-functional teams at SVCE brainstormed on risks facing the agency over the next five calendar years. Out of those discussions, the team prioritized five stress test scenarios that based on staff’s professional assessment could have the most severe consequences for SVCE.
Four out of the five scenarios are impacted by market price uncertainties:
1. Significant drop in energy prices that result in higher Power Cost Indifference Adjustment (PCIA) and lower Pacific Gas and Electric (PG&E) generation rate.
2. Insufficient financial liquidity caused by:
a. Energy price collapse that reduces SVCE’s margins and triggers credit downgrades b. Higher energy collateral postings form counterparties and the California Independent System Operator (CAISO)
c. Pending regulatory case that significantly increases Financial Security Requirements (FSR) to the Provider of Last Resort (POLR), which for SVCE currently is PG&E. FSR amounts posted are held by POLR as financial security in the event a community choice aggregator’s (CCA’s) customers are returned to POLR such as during a CCA bankruptcy.
3. Power Purchase Agreements (PPAs) default, renegotiate for higher prices and/or delay their commercial start dates that result in RPS non-compliance penalties and replacement of energy and RA at higher market prices.
4. SVCE loses load due to direct access and growth in distributed energy resources.
The fifth scenario addresses risks that deal with threat to public services or facilities and will be discussed in a closed session of the Committee meeting.
Other scenarios that were not selected but could be selected in the future include:
• Operational Risks
o Modeling Errors
o Process failures
o Governance and Risk Control Weaknesses
• Additional risks from Regulatory and Legislative actions Item 4
IA'\ SILICON VALLEY ~ CLEAN ENERGY
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• Additional Areas of Risks that can affect SVCE’s services and facilities
ANALYSIS & DISCUSSION
The key finding from the stress test analyses is that the most significant financial risk facing SVCE is a collapse in energy prices. A collapse in energy prices will significantly reduce SVCE’s revenues because of higher PCIA and lower PG&E generation rates and will not significantly reduce our energy purchase costs because the prices for most of the forward energy purchases are locked as result of hedging over the next five years of the stress test study period with more hedges in the earlier years following the Energy Risk Management Policy hedging targets. The price collapse impact overwhelms all other stress factors.
The attachments to this report contain the summary tables with financial results under the current base case scenario and the modeled stress case scenarios. The base case shows significant growth in reserves from forecast 2022 level of $227 million to $322 million at the end of 2023 and continued strong growth in margins over the next five years1. The modeled results are based on the assumptions that the current high forward prices and other modeled assumptions especially those around PCIA and PG&E generation portfolio prevail.
PCIA and PG&E generation portfolio assumptions are based on public data as best modeled by the California Community Choice Association (CalCCA) consultant NewGen Strategies and are highly uncertain. In addition to not knowing the contents of the PCIA portfolio and PG&E’s generation portfolio, PG&E’s portfolio management strategy may change from those modeled, and the California Public Utilities Commission (CPUC) may moderate future PG&E generation rate increases. All these uncertainties make the absolute value of the results highly unreliable. Nevertheless, the relative differences among the base case and the modeled stress test scenarios are highly pertinent in understanding our strategic risks. The focus of the stress test is on the delta of the base case to the stress test results.
The following is a summary of what the staff expected when constructing the scenarios versus the results of the analyses.
Scenario 1 – Prices Collapse
Expectation: Because of higher PCIA and lower PG&E Generation rate, SVCE’s revenues will drop significantly and meeting operating expenses while maintaining a one percent effective discount rate to comparable PG&E’s rates will lead to significant draw from reserves.
Result: Same as expected.
To provide customers with competitive rates, SVCE sets its generation rates such that customers receive an effective Board designated discount, currently set at one percent, to comparable PG&E rates. Because CCA customers must pay PCIA charges, to provide the effective discount rate SVCE reduces its rate by the PCIA amount. As a result, if PCIA increases and PG&E generation rate decreases, SVCE generation rates and therefore revenues decline.
Market prices for energy are at an all-time high level with most of the increases occurring in the last 12 months. Stress test Scenario 1 assumes that market prices beginning in 2023 and for all forward months in the five-year study period drop to the one percentile level, which is close to where prices were trading as recently as twelve months ago. If this were to occur and SVCE maintains its current rate methodology, then there would be a draw of $178 million from reserve in 2024 leaving days cash on hand (DCOH) at 181 days and DCOH declining to 41 by 2027, well below the current Board established minimum target of 120. The reserves start at a high-level of $322 million (388 DCOH) at the end of 2023 because of the current high prices. Per the scenario assumptions, the price collapse occurs at start of 2023, but the impact will not be felt 1 SVCE’s reserves as of March 31, 2022, was at about $147 million and the corresponding days cash on hand was at 165.
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until 2024 when new PCIA and PG&E generation rates take effect reflecting the lower realized prices in 2023 and lower forwards for 2024.
Scenario 2 – Price Collapse leads to insufficient financial liquidity Expectation: Price collapse would trigger large collateral postings and lead to large draw from reserves.
Result: Price collapse does not trigger any significant liquidity needs. However, there’s large draw of $35 million that’s modeled for potential regulatory change to the financial security requirement (FSR) deposit for CCA’s.2
The standard credit risk management practice, except for long-term Power Purchase Agreements (PPAs), is the requirement to post collateral, usually cash or letters of credit, when the exposure to the counterparty reaches the negotiated credit limit. A price collapse would increase our counterparties credit risk or exposure to SVCE and per the contract when the credit limit is reached SVCE must post the required collateral. Because of SVCE’s active management of collateral posting requirement including placing key counterparties in a lockbox mechanism in return for not having posting requirements and long-term PPAs not being subject to this requirement, the price collapse does not have a significant impact on liquidity.
The most significant impact comes from regulatory uncertainty under potential changes to the FSR requirements. Each CCA is required to post an FSR amount to their incumbent investor-owned utilities (IOU), PG&E for SVCE, that the utility can draw upon should the CCA fail and return its customers to the IOU. The IOUs are currently the provider of last resort (POLR). The current FSR methodology is largely based on the difference between the IOUs retail rates and forecast of serving the CCA load over a 6-month period, where the FSR is adjusted every six months. Under current regulatory proceedings, certain proposals from the IOUs that seems to be gaining traction could increase the posting requirement for SVCE to two months of the energy cost of serving the customers, which under current market conditions could be as high as $70 million.
Because under the stress case assumption, the price collapse would reduce the cost of serving the customers, the FSR is modeled at $35 million.
The stress test modeling of additional liquidity needs of $35 million for FSR is additive to the Scenario 1 price collapse. As a result, Scenario 2 is the most consequential of the four price uncertainty scenarios modeled. If Scenario 2 were to occur, the DCOH in 2024 would be 137 and by 2027, SVCE would run out of cash.
Scenario 3 – PPAs default/delay/renegotiate for higher prices Expectation: Price increases result in higher replacement cost.
Result: Price increases lead to substantial increases in revenues which far exceed the increase in higher energy procurement costs.
If our PPAs default on their contractual obligations, delay their commercial operation date, or renegotiate for higher prices, SVCE’s energy procurement cost could increase substantially. The higher costs would occur under a high price scenario. If prices are low, then the energy can be replaced at relatively lower prices.
Another cost dimension is RPS compliance penalties, under the modeled scenario the non-compliance penalties were not significant.
While the procurement costs would increase under the price increase scenario, the growth in revenues from lower PCIA and higher PG&E generation rates far offset the increase in procurement costs. The scenario results in more favorable outcome than the base case and for this reason, the results shown for Scenario 3 in the attachment assumes the Scenario 1 price collapse assumption. 2 The current FSR posting for SVCE is at the minimum required level of $147,000.
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While under the entirety of the price increase scenario the results are favorable, SVCE must continue its efforts to ensure the PPAs perform as expected. Isolating (ignoring the increase on the revenue side) the increase in the procurement cost of energy under the high price scenario could cost approximately $80 million in 2026.
Scenario 4 – Load Loss
Expectation: Load loss along with price collapse leads to stranded assets.
Result: Price collapse significantly reduces SVCE revenues, as explained in scenario 1, such that the operating margin turns negative, and loss of load reduces selling energy at a loss.
The results of this scenario are better than those of scenario 1.
This scenario assumes that SVCE loses 10% of load in 2025 and another 10% in 2027 from growth in direct access and distributed energy resources. In addition to lost revenues, load loss can result in stranded assets.
The stranded assets are the powered procured on the departed customers behalf that must now be sold in the open market. The assets will be stranded if SVCE has to sell the power at a loss, which would occur under a low-price scenario such as those modeled under Scenario 1. As explained in Scenario 1, price collapse leads to significant loss of revenues such that the operating margin in years 2024 to 2025 is negative. Under this condition, load loss reduces selling more energy at a loss resulting in slightly better financials than those of Scenario 1.
SVCE should continue its efforts to retain and attract customers. While the modeled stress scenario is overwhelmed by the price collapse factor, on an expected basis relative to the base case, load loss of 10% in 2025 and another 10% in 2027 would harm SVCE by about $8 million in 2025, $8 million in 2026 and $16 million in 2027.
STRATEGIC PLAN
These analyses support SVCE Strategic Plan Goal 13 – “Commit to maintaining a strong financial position” and the accompanying measures, “Set balanced rates that maintain customer value and support SVCE’s financial stability” and “Balanced budget that achieves cash reserve targets and maintains customer value”.
FISCAL IMPACT
The stress test analyses shows that the key financial risk facing SVCE is a collapse in energy prices that can significantly reduce revenues and require substantial draw of funds from the reserves. The best mitigation of this risk is to hold sufficient fund in reserves. Staff will use the results of these analyses to recommend reserve levels for the Board to consider in setting the Fiscal Year 2022-23 budget.
Staff is also reviewing SVCE’s energy hedging strategies. Some of the challenges in setting the hedging strategy is the uncertainty in modeling the PCIA and PG&E generation rates along with potentially increasing the volatility in power supply costs relative to the budgeted costs.
ATTACHMENT
1. Summary of Base Case Results
2. Summary of Stress Test Results
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Attachment 1 – Summary of Base Case Results
2023 2024 2025 2026 2027
Revenues $ 398 $ 410 $ 391 $ 374 $ 375
Power Supply Cost $ 271 $ 281 $ 279 $ 272 $ 272
Operating Margin $ 127 $ 129 $ 112 $ 102 $ 102
Other Costs $ 32 $ 32 $ 33 $ 33 $ 34
Net Contribution to Reserves $ 95 $ 97 $ 79 $ 69 $ 69
Projected Reserve Balance $ 322 $ 418 $ 497 $ 566 $ 635 Days Cash on Hand 388 487 582 677 758
Uncertain
Highly
Uncertain
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Attachment 2 – Summary of Stress Test Results
Stress Case 1 - Significant Drop in Energy Prices
2023 2024 2025 2026 2027
Revenues $ 398 $ 112 $ 240 $ 236 $ 236
Power Supply Cost $ 271 $ 257 $ 246 $ 240 $ 239
Operating Margin $ (145)$ 127 (5)$ (5)$ (3)$
Other Costs $ 32 $ 33 $ 33 $ 34 $ 34
Net Contribution to Reserves $ (178)$ (38)$ (38)$ (36)$ 95 Reserve Balance $ 322 $ 144 $ 106 $ 67 $ 31
Days Cash on Hand 388 181 138 90 41
Stress Case 2 - Insufficient Liquidty
2023 2024 2025 2026 2027
Revenues $ 398 $ 112 $ 240 $ 236 $ 236
Power Supply Cost $ 271 $ 257 $ 246 $ 240 $ 239
Operating Margin $ 127 $ (145) $ (5) $ (5) $ (3)
Other Costs $ 32 $ 33 $ 33 $ 34 $ 34
Net Contribution to Reserves $ 95 $ (178) $ (38) $ (38) $ (36) Reserve Balance $ 227 $ 322 $ 144 $ 106 $ 67 $ 31
After FSR Requirement $ 287 $ 109 $ 71 $ (4)$ 32
Days Cash on Hand 346 137 92 43 (5)
Stress Case 3 - PPAs Default
2023 2024 2025 2026 2027
Revenues $ 398 $ 112 $ 240 $ 236 $ 236
Power Supply Cost $ 258 $ 239 $ 229 $ 227 $ 226
Operating Margin $ 139 $ (127) $ 11 $ 9 $ 11
Other Costs $ 32 $ 33 $ 33 $ 34 $ 34
Net Contribution to Reserves $ 107 $ (159) $ (22) $ (25) $ (23) Reserve Balance $ 227 $ 334 $ 175 $ 153 $ 128 $ 105
Days Cash on Hand 420 235 212 179 148
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Stress Case 4 - Load Loss
2023 2024 2025 2026 2027
Revenues $ 398 $ 112 $ 216 $ 212 $ 189
Power Supply Cost $ 271 $ 257 $ 210 $ 204 $ 168
Operating Margin $ 127 $ (145) $ 7 $ 8 $ 21
Other Costs $ 32 $ 33 $ 33 $ 34 $ 34
Net Contribution to Reserves $ 95 $ (178) $ (26) $ (26) $ (13) Reserve Balance $ 227 $ 322 $ 144 $ 118 $ 92 $ 79
Days Cash on Hand 388 181 177 141 143
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