Capital Markets

CFOs React: Southern Company’s Paul Bowers

One day after the bailout bill failed in Congress and the market took its largest point plunge ever, the finance chief of the South's largest utili...
Tim ReasonOctober 2, 2008

With electric utility subsidiaries in four Southern states, the Southern Company is used to responding to violent storms. “We’re known for how we respond to get the wires back up,” says CFO Paul Bowers.

Now, in the midst of one of the worst financial crises in the nation’s history, it is Bowers’s turn to keep a different type of juice flowing. He spoke to the day after the financial bailout bill failed to pass the House, sending the market to its largest point drop in history. “Everybody’s focus is on keeping the flow of cash as we go through this hurricane of financial uncertainty,” he says.

That’s kept his treasury department busy, he says, as the credit markets remain largely unwilling to hand out anything other than short-term credit. “Our treasury department has to be on their toes every morning, assessing the market and the needs of the business, and just re-upping and replacing 24-hour notes.”

That makes him grateful for the company’s ‘A’ credit rating, which “has proven its worth.” Still, Bowers says the company has seen rates rise on its short-term debt — commercial paper and daily tax-exempt floating rate notes or “daily floaters.”

The daily floaters provide one example of how the cascading problems of the credit markets keep changing the game for CFOs like Bowers. After the auction-rate securities market froze up in February, Southern Company turned from that form of funding to the daily floaters, which, given the inverted yield curve, had an attractive interest rate.

But the floaters also provide investors with a put — the ability to the redeem the notes on demand. As the financial crisis grew, so did the likelihood of puts. “We saw a few of those last week when confidence was real low,” says Bowers. That posed an immediate quandary for Bower’s finance team: how many more puts might follow and how would the company pay them off? “We built up a cash reserve to protect us from that” by issuing additional CP, says Bowers, and since then the company has seen only a “minimal” number of puts. “The first got our attention, but after that there hasn’t been a lot redeemed.”

Bowers also notes the company had no cash stashed in money markets when the oldest of those funds “broke the buck,” raising fears that the safest of investments would begin unraveling. Yet now, he says, with the government backstopping money market funds, Southern Company has moved into money markets. “It’s better than putting it in treasuries,” says Bowers, who also holds the title of chief risk officer. “You’re making economic choices here.”

Bowers is luckier than many CFOs — although Southern Company saw its stock slide along with the rest of the market, utility companies tend to be viewed as a relatively safe bet by investors in times of crisis. Just before the crisis began gathering steam on September 15, with the bankruptcy of Lehman, the company placed a $600 million bond offering that was oversubscribed. And speaking with the day after the bailout failure in Congress, Bowers’s voice grew muffled as he leaned back from the phone to check the stock market. “Utilities up two percent,” he reported cheerfully.

But in this current crisis, he admits, his main concern isn’t the stock price, it’s access to credit from lenders. “Yes, there are stock price implications, but you quickly come to the tactical implication: what does this [crisis] mean for our businesses?”

For Bowers, it means staying in touch with the jittery banking community, both to remind his bankers of Southern Company’s stability and to listen carefully for further signs of instability and consolidation among the banks. For example, he says, Southern Company has credit facilities with Wachovia, which was acquired almost overnight by Citigroup in a deal announced Monday. “We’re just making sure we still have those backstops available to us,” he says. “Right now, [Citigroup] recognizes the value of those credit lines.”

“The thing we have to do,” says Bowers, “is build that rapport with the banks, make sure we are transparent and have no surprises.” At the same time he says, “we monitor the confidence level within the financial community. Do they think the worst is over? What is the tone? What are those signals telling us?”

Indeed, those signals are now almost more important that the internal ones that CFOs traditionally monitor. Utilities have expensive, ongoing maintenance needs, and Southern is now in the first year of a three-year, $13.6 billion capital expansion, the largest in its history. Bowers has already done the math, and says that he could potentially defer $100 million in expenses this year if necessary — only a tiny slice of that total. “We are currently assessing how much flexibility we have,” he says.

Bowers has been with various companies and divisions within Southern Company since 1979. He is now in his seventh month as CFO, having taken over from his predecessor — Thomas Fanning, now COO — last February.

“I told Tom he’s got great timing,” jokes Bowers.

Joking aside, Bowers says he can’t remember a time like this during his career. The recession of the 1980s, he says, “wasn’t a question of access to capital, it was just an economic downturn.” After September 11, 2001, he says, Southern Company was temporarily forced to tap its credit facilities — something it hasn’t done in this current crisis — but that was because banks simply couldn’t be reached. “The ability just to communicate with financial institutions was the big stress.”

“Now,” he says, “there is just the loss of confidence in the banks themselves and in their ability to loan you money. That’s a unique event in our history.” Indeed, says Bowers, as LIBOR soared overnight, he couldn’t help wonder, “is there going to be a debt market?”

Just one day after the first bailout attempt failed and with Congress out for two days, however, Bowers seems optimistic. “I feel like some rational behavior is starting to emerge.” Floating rates on Southern Company’s short-term debt came down in the wake of the stock market plunge. “Banks say there is a positive outlook for term deals. At least they’re talking about that.”

Bowers says he’s also making sure he stays in touch with another key constituent: Southern Company’s employees. For example, he says, Merrill Lynch, since acquired by Bank of America, was the company’s 401(k) manager, and Bowers says it was essential to let employees know their retirement accounts would be unaffected. Likewise, he says, Southern Company’s pension was overfunded, which “gave us a cushion.” The company’s website carries regular updates, and Bowers appears regularly in videotaped segments to talk to and reassure employees. “We are not ignoring them at all — it is active, real-time communication.”

“I’m trying to get us to remain calm, manage through the volatility of this uncertainty, and then I think we will get some more rational behavior and get some more length on this debt,” Bowers says. “It’s a great time to be in the CFO position.” Oddly, he doesn’t sound like he’s joking.