Sacramento electric utility brings green verification to commercial paper
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Sacramento Municipal Utility District
Sacramento Municipal Utility District officials credit a green verification from Kestrel for drawing the additional interest needed to push a commercial paper sale over the finish line.
The 75-year-old SMUD, the nation’s sixth-largest public power utility, provided electricity to
SMUD’s CP sale carried the Kestrel-Verified Green Commercial Paper Certificate, an independent external review.
“This was the inaugural issuance,” said Monica Reid,
“We have run close to $3 trillion in bonds through an analysis of what municipal bond issuers are doing for sustainability and resilience,” Reid said, adding the CP framework leverages that analysis.
The addition of the commercial paper verification is “important, because it’s improving access to short-term investments, enabling growth in sustainable financial markets and adding more transparency on short-term assets,” said April Strid, Kestrel’s head of research and lead verifier.
The utility’s finance team has “semi-regularly received inquiries from bond funds that are more interested in green sustainable financing,” said Jon Anderson, SMUD’s treasurer.
SMUD has a plan to hit 100% zero carbon by 2030, 15 years ahead of California’s 2045 mandate, according to the utility. The utility is a national leader in decarbonizing electric power generation, according to Kestrel.
SMUD’s green commercial paper ranks in the top 5% of all electric power utilities with a cumulative Sustainability Score of 4.68/5, Reid said. SMUD’s sustainability scores and verified transition plan helped the utility’s commercial paper earn the green verification, she said.
Barclays was the sole dealer on the $25 million tax-exempt Series L commercial paper issued April 29 for a tenor of 36 days at 3.15% that attracted a new impact fund investor, according to joint
“The participation of a new buyer was a positive signal, particularly given the broader market dynamics following the April tax season,” the news release said.
“During that period, elevated redemptions from money market funds created temporary pressure in the short-term tax-exempt market, with commercial paper rates rising to the 3.5%-4% range.”
SMUD issued an additional $25 million of green CP notes on May 6 for a tenor of 63 days at a rate of 2.9% and expects to issue additional notes under its $400 million authorized Green CP program over the next 12 months, according to the release.
The volume of commercial paper being issued is typical spring volume to support capital programs and to “keep cash where we want it,” Anderson said.
SMUD also priced $300 million in tax-exempt electric revenue bonds in two separate, but concurrent deals on June 10, of which $200 million was green debt certified by Kestrel.
Leading a seven-bank syndicate, Barclays priced $100 million Series O senior-lien green electric revenue bonds with 5% coupons, yields ranging from 2.59% on four-year maturities to 3.93% on the 15-year.
Separately, the bank priced $200 million subordinate electric revenue bonds June 10 in a $100 million refunding Series E tranche and a $100 million new money green bond Series F. The refunded bonds priced at 5% coupons with a 3.16% yield maturing Aug. 15, 2049. The green bonds priced at 5% coupons with a 3.06% yield to Aug. 15, 2055, maturity.
The proceeds of the 2025 series O bonds are expected to refinance certain improvements and additions to SMUD’s electric system, including by paying all of the outstanding principal amount of SMUD’s CP notes at maturity, and covering costs associated with the issuance of the 2025 Series O Bonds, according to the offering statement.
The subordinate bonds finance and refinance improvements and additions to the electric system, refund the 2019B refunded subordinate bonds and pay issuance costs, according to the offering statement.
PFM was financial advisor and Orrick, Herrington & Sutcliffe was bond counsel on all three tranches.
The O series bonds received an AA rating from Fitch Ratings and Aa2 rating from Moody’s Ratings. Fitch assigned the same AA rating to the subordinate debt, but Moody’s assigned its Aa3 rating. All of the debt received stable outlooks.
The verification process for the CP was a “small lift” for SMUD, because it was similar to the process it had to undergo before issuing green bonds, Anderson said.
It worked out well, because when the broker-dealer began marketing efforts, “it sounded like green CP was getting more attention, and attention from a broader, and more diverse, set of issuers,” Anderson said. “And one in particular that wouldn’t purchase CP at such a short duration, received a variation from internal policies so they could purchase green paper.”
Anderson declined to name the fund, but said it was a sustainable bond fund.
“It was an instance we could point to an issuance where it brought in investors who wouldn’t have otherwise purchased our debt,” Anderson said.
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“I always thought that as long as there is no trading differential between green and non-green bonds, that touting green bonds is a way to market this subsector,” said Howard Cure, a partner and the director of Municipal Bond Research for Evercore Wealth Management.
“I don’t know if the same demand for green bonds would continue if a buyer or fund would have to sacrifice yield to pursue these holdings – there are states who have not embraced the ESG concept,” Cure said.
The projects green bonds fund need to continue, Cure said, because “various infrastructure needs revolve around fortifying systems that endure climate change. Whether or not these bonds will continue to be monitored as green bonds is another story.”
