1 • Subtitle
New SV Clean Energy
PowerPoint Template
Third Prepay
Transaction
Amrit Singh
Finance and Administration Committee
October 03, 2023
Item 2
PRESENTATION
2 Main Areas of Discussion
Purpose
Action:
1. Recommend that the Board
Authorize the CEO to Execute
Agreements with Firms Providing
Services to Enable SVCE to
Execute its Third Prepay
2. Recommend Board Approve the
Parameters of the Transaction
1. Review of Prepay Goal and Structure
2. Leverage the First and Second Prepay
Structure
3. Fees for Consultants and Counsel
4. Board-authorized parameters for
execution of the deal
5. Fiscal Impact
6. Next Steps
7. Appendix • Review of First 2 Prepays • Overview of Prepay Structure and Background Information
Item 2
PRESENTATION
3 Review of Prepay Goal and Structure
Substantial savings with minimal risks
Goal
• Reduce the cost of power
purchases by leveraging SVCE’s
ability to fund low-cost tax-exempt debt
• Gain competitive advantage
relative to Investor Owned
Utilities (IOUs)
How
• Benefit from the spread between taxable and tax-exempt interest rates
• Use of financially engineered prepay structure*
• Bonds not guaranteed by SVCE or California Community Financing Authority (CCCFA).
• Bonds secured by the contractual rights and transaction cashflows • Seasoned team of professionals helps guide, negotiate, and structure the transactions.
*Refer to the appendix for a more detailed overview of prepay structure Minimal Risks
• Fees (except rating agency) are contingent on the execution of the deal and paid from the bond proceeds • Bonds issued are non-recourse to SVCE
Item 2
PRESENTATION
SILICON VALLEY
CLEAN ENERGY
4 Leverage the Existing Prepay Structure
Slides in the appendix provide:
• Timeline of the first Prepay
transaction
• Details of the SVCE’s Two
Prepays transaction and cost
breakdown
• Overview of the Prepay
Structure
Recommend the Board Authorize Agreements to Initiate Third Prepay Transaction • Replicate the existing Prepay transaction structure
• Benefit from over two years of effort to establish the structure
• Successfully executed two prepays using this structure • Combined savings of two completed transactions are about $6.5 million annually
• Other CCAs have taken or plan to take advantage of market opportunities to execute Prepays
• Since the execution of our first Prepay in partnership with EBCE:
• MCE, CPA, and Pioneer have executed Prepays
• EBCE has executed 3 Prepays, and CPA has executed 2
• 3CE is pursuing its first Prepay transaction
• Par Value of CCCFA transactions is just over $7 Billion Item 2
PRESENTATION
5 Recommend Board Adopt Execution Parameters
• Expect principal bond amounts to be in
the range of $900 Million to $1.5 Billion
• Actual realized discount will depend on
the spread between taxable and tax-exempt rates (net of transaction costs) • Savings could be $5 million or more a
year during the initial term of the bonds
• 30-year bonds will reset after the initial
period, expected to be 5-10 years, and
discount on future reset periods will
depend on the prevailing market
conditions.
• The repricing agreement will set a
minimum discount threshold for future
bond reset periods, expected to be at
energy savings of about 4%.
Prepay Transactional Agreements Contingent on Board-Authorized Parameters • Execution Contingent on:
• Aggregate principal amount of bonds will not
exceed $1.5 billion
• Bonds issued by the California Community
Financing Authority (CCCFA) are not guaranteed
obligations of SVCE
• Overall energy savings to SVCE shall be at least
8 percent during the initial term of the bonds
• The commodity swap counterparty fee is not to
exceed $0.50 MWh.
Item 2
PRESENTATION
6 Recommend Board Approve Morgan Stanley as
Prepay Supplier
Morgan Stanley was the Prepay Supplier for SVCE’s First 2 Prepay Transactions Morgan Stanley Fee Structure (same as that of First Two Prepays):
• Bond underwriting fee of $5/bond plus underwriter expenses not to exceed $0.50/bond. • E.g., For issuance of $1 billion in bonds, with a face value of $1000 a bond, the underwriting fee would be $5 million. • Energy Service Revenue of $1.10 per MWh
• If floating rate debt is issued, a 2 to 6 basis point charge on an interest rate swap • Minimal risk to SVCE.
• All costs (underwriting, consultants, and attorneys) are paid from the bond proceeds. • The Board-designated savings target will be net of all costs.
Item 2
PRESENTATION
7 Recommend Board Approve 3rd Party
Agreements to Initiate Prepay
At ~35% Discounted Fee for Third Prepay
Except for Moody’s all payments are contingent on the execution of the transaction.
The agreement with Moody’s will be executed later when there’s more certainty on the likelihood of a transaction.
* For the first Prepay, SVCE worked with Orrick, Herrington & Sutcliffe as the bond and tax counsel at a higher cost of $425,000. • Expected Cost of 3rd Party
Agreements is $852,200
• Authorize the CEO to execute up
to 1% of the bond proceeds
Account for other ancillary
services, including green bond
verification, bond trustee and
counsel fees, an investment
advisor fee, other miscellaneous
costs such as printing, and Morgan
Stanley underwriting-related fees
described in the earlier slide.
Item 2
PRESENTATION
Firms Role First Prepay Second Prepay
Proposed for
Third Prepay
PFM Financial
Advisors LLC /
PFM Swap
Advisors
Municipal Advisor: Advises prepay
buyer innegotiations,requiredby
the Municipal Securities Rulemaking
Board(MSRB), and on commodity
and interest rate swaps.
$250,000 $175,000 $155,000
Chapman &
Cutler
Disclosureand Issuer’s Counsel:
Provides legal counsel and prepares
official statement and prospectus
$310,000 $200,000 $175,000
Ballard Spahr* Bond and Tax Counsel: Represent
bondholders and providetax opinion
on the transaction
N/A* $300,000 $250,000
Moody’s Investor
Service Inc
Rating Agency: Provides the credit
ratingfor the bonds
$315,000 $232,500 $272,500
Total $1,300,000 $907,500 $852,500
S'
8 Prepay Load Coverage
Can easily cover 50-60% of load; after that we will need to further optimize the portfolio.
On average:
• Prepay 1 covers about 11% of the
Load
• Prepay 2 covers about 12% of the
Load
• Prepay 3, if executed at $900 Million
Par, would cover 12% of Load
• Prepay 3, if executed at $1.5 Billion
Par, would cover 20% of the Load
• Total average load coverage is expected to
be around 35% to 45% of Load
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
202220232024202520262027202820292030203120322033203420352036203720382039204020412042204320442045204620472048204920502051205220532054 Prepay Load Coverage
2021B + 2023B + 2023x ($1.5bn Par)
2021B Load Coverage 2023B Load Coverage 2023x - $1.5bn Par Coverage Item 2
PRESENTATION
9 Fiscal Impact
• Actual savings depend on market conditions - the spread between taxable and tax-exempt debt rate
• Illustrative:
• If we get savings of 8 to 10% for a 50 MW around-the-clock transaction at current commodity prices, this could amount to $5 million savings per year
• Minimal Risk to SVCE
• Fees (except rating agency) are contingent on the execution of the deal and paid from the bond proceeds
• Bonds issued are non-recourse to SVCE
Cumulative Savings
from 3 Prepays Could
be $11.5 million a Year
or More (based on initial
bond reset periods)
1st - $1.9
MM
2nd - $4.7
MM
3rd - ~$5
MM or More
Item 2
PRESENTATION
10 Next Steps
• Seek California Community Choice Financing Authority
(CCCFA) Board Approval at its October 26th, 2023,
Meeting
• Target bond issuance for November 2023. Timing will
depend on market conditions.
Item 2
PRESENTATION
11 Recommend for Approval
• Staff requests that the Finance and Administration Committee recommend that the Board authorize the CEO to approve or execute the following contracts for services these firms will provide to enable SVCE to execute its third Prepay transaction. The combined fees for services provided by the firms identified below shall not exceed 1% of the bond proceeds amount, including other ancillary services such as green bond verification, bond trustee and counsel fees, an investment advisor fee, and other miscellaneous costs such as printing.
1. PFM Financial Advisors LLC & PFM Swap Advisors - $155,000
2. Chapman & Cutler (Disclosure/Issuer’s Counsel) - $175,000
3. Ballard Spahr (Bond and Tax Counsel) - $250,000
4. Moody’s Investor Service Inc (Credit Rating) - $272,500 • Staff requests that the Finance and Administration Committee recommend that the Board approve engagement with Morgan Stanley as the Prepay Supplier with the following fee structure:
• Bond underwriting fee of $5/bond
• Underwriter expenses not to exceed $0.50/bond.
• Staff requests that the Finance and Administration Committee recommend that the Board authorize the CEO to execute Power Supply Contract with California Community Choice Financing Authority (CCCFA) and execute or approve the related supporting agreements to enable SVCE to enter an approximately 30-year energy prepayment transaction subject to the following parameters:
1. The Bonds, issued by CCCFA, will not be guaranteed obligations of SVCE but will be limited obligations of CCCFA payable solely from the revenues and other amounts pledged under the Indenture as the Trust Estate, including amounts owed by SVCE under the Power Supply Contract.
2. The aggregate principal amount of the Bonds shall not exceed $1,500,000,000.
3. The energy savings to SVCE under the Power Supply Contract for the initial Reset Period, including the Annual Refund (as defined in the Power Supply Contract), shall be at least 8 percent.
4. The energy service revenue fee in the transaction shall not exceed $1.10 per MWh.
5. The commodity swap counterparty fee in the transaction is not to exceed $0.50 MWh.
6. If floating rate debt is issued, Morgan Stanley shall charge no more than six basis points on the interest rate swap spread to mid-market.
Item 2
PRESENTATION
12 Thank you! / Questions?
Item 2
PRESENTATION
13 Timeline of SVCE’s First Prepay
Transaction
Oct-2020 SVCE Board Authorizes CEO to enter legal service agreements to finalize Prepayment Transaction (Orrick, Herrington & Sutcliffe and Chapman & Cutler LLP)
Nov-2020SVCE provides Prepay Status Report to Finance and Admin Committee Mar-2021SVCE provides Prepay Status Report to Finance and Admin Committee SVCE provides Prepay Status Report to Executive Committee April-2021SVCE Board Approves Participation in the California Community Choice Financing Authority Joint Powers Authority
Aug-2021The Finance and Admin Committee reviews the Prepay Transaction and votes to recommend Board approval. Board authorizes execution of the first Prepay Transaction subject to parameters including that bonds are not obligations of SVCE, size of the bonds, and minimum savings target.
Sept-2021Sept 9, 2021 bonds priced
Jan-2022 Power delivery under Prepay began
June-2019SVCE presents Prepay Structure Overview Presentation (developed by Goldman Sachs) to Finance and Admin Committee
Aug-2019 SVCE presents a brief verbal update on prepay process to Finance and Admin Committee
Sept-2019SVCE and PFM Financial Advisors provide update on the upcoming RFP process to Finance and Admin Committee
Nov-2019 SVCE provides Prepay RFP Overview to Executive Committee - PFM issues RFP to select Prepay Bank Supplier on behalf of EBCE and SVCE on Nov 12th
- RFP Proposals were due December 5th
Jan-2020 SVCE presents Prepay Structure Overview to Finance and Admin Committee Spring-2020SVCE and EBCE conduct RFP evaluations to select Prepay Bank Supplier July-2020SVCE and EBCE select Morgan Stanley as Prepay Bank Supplier Aug-2020 SVCE provides Prepay Status Report to Finance and Admin Committee Sept-2020SVCE provides Board with Prepay Overview on preparing for a Prepay Transaction
SVCE provides Prepay Status Report to Finance and Admin Committee Item 2
PRESENTATION
14 Details of the First Prepay Transaction
Aggregate Principal Bond Amount $1,234,720,000 (SVCE and EBCE combined) Total Bond Proceeds $1,475,895,642.5 (SVCE and EBCE combined) Municipal Bond Rating A1
Green Certification Designated Green Bonds by Kestrel Verifiers Initial Bond Pricing Period
• 10 years.
• After the initial period, bonds will be repriced per the negotiated repricing agreement, and a new discount will be established based on the then prevailing market conditions.
Final Bond Maturity Date • February 1, 2052.
Discount Achieved
• $4.38 per MWh, about 10% of the energy cost of SVCE’s 3-year transaction initially assigned into the Prepay.
• ~$1.9 million per year for SVCE during the initial bond pricing period of ten years.
Energy Volume Supported by Bond Proceeds
109 MW, of which SVCE’s share is 50 MW (about 11% of load) and EBCE’s share is 59 MW for approximately the first ten years of the transaction; after that, the same proportional volume split will be maintained between SVCE and EBCE.
Item 2
PRESENTATION
15 First Prepay Transaction Cost Breakdown ($000)
Bond and Tax Counsel: Orrick, Herrington & Sutcliffe 425 Credit Rating: Moody’s 315
Issuer’s Counsel and Disclosure Counsel: Chapman & Cutler LLP 310 Municipal Advisor: Public Financial Management 250
Investment Advisor: Public Financial Management Asset Mgmt 42 Trustee: Bank of New York (BNY) 32
Trustee Counsel: BNY Counsel 35
Printing Cost 3
Contingency/Other 10
Total COI 1,422
Morgan Stanley Underwriting 6,341
Total 7,763
Item 2
PRESENTATION
16 Details of the Second Prepay Transaction
Aggregate Principal Bond Amount $841,500,000
Total Bond Proceeds $891,418,648.1
Municipal Bond Rating A1
Green Certification Designated Green Bonds by Kestrel Verifiers Initial Bond Pricing Period
• 6.5 years.
• After the initial period, bonds will be repriced per the negotiated repricing agreement, and a new discount will be established based on the then prevailing market conditions.
Final Bond Maturity Date • July 1, 2053.
Discount Achieved
• $9.77 per MWh, about 10% of the price established for energy deliveries under the power supply contract.
• ~$4.7 million per year during the initial bond pricing period of
6.5 years.
Energy Volume Supported by Bond Proceeds
~55 MW (about 12% of load; a slight escalation in the latter half of the transaction)
Item 2
PRESENTATION
17 Cost of Issuance (COI) $ in 000’s
Bond and Tax Counsel: Ballard Spahr 300
Credit Rating: Moody’s 232.5
Issuer’s Counsel and Disclosure Counsel: Chapman & Cutler LLP 200 Municipal Advisor: PFM Financial Advisors LLC 175
Investment Advisor: PFMAM (US Bank) 35
Trustee: BNY Mellon Corporate Trust 30.9
Trustee Counsel: Ballard Spahr 30
Printing Cost: ImageMaster 3.3
Green Bond Second Party Opinion: Kestrel 22
Contingency/Other 16.8
Total COI 1,045.5
Morgan Stanley Underwriting 4,359.2
Total 5,404.7
Second Prepay Transaction Cost Breakdown ($000)
Item 2
PRESENTATION
18 Overview of Prepay Structure
Term: 30-year with bonds repricing every 5-10 years
depending on the optimal spread between taxable
and tax-exempt interest rates.
Process:
1. SVCE partially assigns, using Limited Assignment
Agreement, energy contract to Morgan Stanley
(MS), Prepay Supplier. MS agrees to pay contract
price to energy supplier.
2. CCAs created CCCFA, a separate legal entity that
can issue tax-exempt debt.
3. CCCFA issues non-recourse tax-exempt bonds.
• Bonds not guaranteed by SVCE or CCCFA.
• Bonds secured by the contractual rights and transaction cashflows; Bonds carry MS credit ratings.
4. CCCFA pays bond proceeds, net of transaction
fees, to MS as prepayment for energy and
related products that MS will provide over the
30-year term. Executes Prepaid Agreement.
5. SVCE and CCCFA execute Power Supply
Agreement, where SVCE pays CCCFA contract
price less discount for energy delivered by
CCCFA.
6. CCCFA uses payments from SVCE to pay interest
and principal payments to bondholders.
Item 2
PRESENTATION
Prepayment $$$
MWhs+ RECs
Morgan Stanley
(Bank
Supplier)
o
CCCFA
MWhs + RECs
Contract Price
Less Discount
Contract
Price
MWhs+ RECs
Energy
Supply/PPA
Counterparty
Debt
Service
Non-Recourse
Tax-Exempt
Bonds
SVCE
Energy Supply/PPA
to be "Partially
Assigned"
19 Review of Prepay Background
Info.
Goal: Reduce the cost of power purchases
• Savings achieved by leveraging SVCE/CCCFA’s ability to fund low-cost tax-exempt interest rates • Used since the 1990s for natural gas transactions
• Codified in the US Tax law
• Part of the National Energy Policy Act of 2005
• Seasoned professionals will help guide, negotiate and structure the transactions. Fees for professionals are contingent on the completion of the deal and paid from the deal proceeds.
Item 2
PRESENTATION
20 History and Tax Law Behind Municipal Prepaid
Energy Transactions
• Municipal electric and gas utilities (and tax-exempt entities such as CCAs) in the US can prepay for a supply of electricity or natural gas from a taxable (corporate) entity and fund that prepayment with tax-exempt municipal bonds:
o Must sell that commodity to their retail end-users that reside within their traditional service area.
• Prepayment transactions are legal and Codified in US Tax Law: Since first prepayments of natural gas were done in the early 1990’s, the IRS issued rules allowing tax-exempt prepayments and Congress enacted legislation specifically allowing the transactions (National Energy Policy Act of 2005; Section 1327).
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PRESENTATION