Anatomy of a deal: California Community Choice authority’s ESG winner

California’s burgeoning array of public community choice aggregators for electricity supply has made their presence known in the municipal bond market.

This year, the California Community Choice Financing Authority issued the largest prepaid renewable electricity bond deal to date with a $1.5 billion transaction that won the ESG/Green Financing category of The Bond Buyer’s 2024 Deal of the Year awards.

Sole underwriter Goldman Sachs in August priced $1.5 billion in clean energy project revenue bonds for the Clean Power Alliance, a public agency that provides electricity to more than a million customers in 35 communities in Los Angeles and Ventura counties.

The transaction is the largest ever for the CCCFA, a joint powers authority established in 2021 to sell conduit bonds for community choice aggregators like the Clean Power Alliance.

California created the CCA structure to provide a dose of public power to customers served by investor-owned utilities. Customers buy electricity from the public CCAs, but pay their regulated private utility, Southern California Edison in the case of Clean Power Alliance, for transmission.

The CCAs then turned to prepaid energy deals — following structures established by municipal natural gas providers — to help lower the cost of power.

“The transaction highlights the growing importance of prepayments in financing the clean energy transition and offers a promising model for other electric utilities across the U.S.,” according to the award nomination.

The August deal brings the total debt issued by CCCFA to $15.5 billion since 2021, said Ted Bardacke, the CCCFA’s chair and chief executive officer of the Clean Power Alliance.

CCCFA officials say it has been the top issuer of green bonds nationally for two consecutive years.

The CCCFA has created an efficient process for issuing prepaid power supply debt that can be replicated by CCAs in other states, Bardacke said.

The underwriters most comfortable handling prepaid gas — Goldman Sachs and Morgan Stanley — have also been the lead bankers on CCCFA prepaid electric deals, Bardacke said.

“The prepay bond market, it’s a well-trodden area and still dominated by issuances for natural gas to drive down ratepayer costs,” Bardacke said.

That it has been picked up by the renewable energy sector should come as no surprise, Bardacke said.

“As the energy industry incorporates more renewables, we are seeing all kinds of possibilities in the financial sector or physical energy generation sector of using instruments developed for the energy industry for renewables,” he said.

“We think our continued use of prepay bonds for renewables shows another way something developed for the fossil fuel industry can be used for the renewable energy industry,” Bardacke said.

Clean Power Alliance

The Clean Power Alliance expects to save $11.6 million annually on energy costs from the $1.5 billion deal and realize 13.1% savings over the initial eight-year period of the bond, he said. 

The green bonds financed a prepayment for 30 years of renewable electricity for Clean Power Alliance customers.

Since the CCCFA’s first prepay deal in 2021, deal size has grown from the $500 million to $1 billion range to the most recent $1.5 billion deal, which helps to increase savings and reduce costs using the financial model, said Kate Freeman, strategic finance manager for the Clean Power Alliance.

Since it’s also the third time CCCFA has done a sizeable deal of this kind with Goldman Sachs, everything is faster and more efficient, and the team can get the deal out the door faster to capitalize on the best market conditions, Freeman said.

Freeman said the financial instrument still requires a bit more explanation to investors than a plain-vanilla deal like general obligation bonds.

“But at this point, the investors have some knowledge of this,” she said. “There have been 18 issuances and it has mainly been Goldman Sachs or Morgan Stanley as underwriter — that continuity and limiting it to a few high quality underwriters makes it easier for investors to get comfortable with the space.”

The deal was rated A1 by Moody’s Ratings, linked largely to the credit quality of A1-rated Athene Annuity & Life Company, which provided the funding agreement.

Clean Power Alliance

As a California issuer, Bardacke said it prices into a market with strong demand for tax-exempt in-state paper, which keeps the investor base broad. He thinks the green designation – it had third party verification from Kestrel — may have attracted investors who seek bonds for green-specific funds, but it’s hard to quantify whether the designation affected pricing at all.

One potential area for growth in the investor pool could be high net retail investors, said Bardacke, adding there hasn’t been strong participation from that sector so far.

The bond was structured “in record time,” Freeman said.

“We basically went to the board this year, and obtained authorization to issue three bonds up to $1.5 billion with three underwriters and then prequalified all of the documents,” she said. “Then we did a short selection, queried the underwriters about their view on the market and on how fast we could go.”

The team went from selection to pricing in two weeks, with closing two weeks after that, Freeman said. “I was impressed with the ability of everyone to get it across the line.”

The increase in interest rates since 2020 has created a situation where prepayment deals work.

They function by effectively allowing the private supplier — in this case, J Aron & Co., a unit of underwriter Goldman Sachs — to obtain capital at lower tax-exempt rates, which allows it to supply energy to the public utility at a discount.

It took a year to learn how to structure these deals, Bardacke said.

“Our board knows municipal bond finance in the realm of GOs, so they needed to learn about this other type of structure,” Bardacke said. “We overcame that initial challenge a few years ago, and now the challenges we are seeing on any individual deal are really about market timing.”

The municipal market has been volatile in recent years, he said.

“We really have to be mindful of market movements and sentiment in a much more granular way as we are looking for the right day, week, month to go to market,” Bardacke said.

“It’s really about interest rates as a driver of savings,” Freeman said. “The difference between taxable rates an underwriter would pay and tax-exempt rates we are able to issue at. We keep a close eye on the windows of opportunity. There are moments in the bond market when prepays don’t pencil out.”

Prepays didn’t make sense for almost a decade after the 2008 recession amid the prevailing low interest rates, she said.

“What we have learned is the market will do what it wants to do, so it behooves us to set things up expeditiously, so we can go to market when the rates look good,” Freeman said.

The bonds financed 845.5 MW of renewable energy from solar and storage assets, avoiding over 775 million pounds of greenhouse gas emissions per year, according to the award nomination.

Municipal Capital Markets Group was financial advisor, Orrick Herrington & Sutcliffe was bond counsel, and Chapman Cutler was project participant counsel.