Capital Markets

How AEP Finance Chief Drove Jumbo Stock Offering

American Electric Power CFO Holly Koeppel pushed the utility into an equity offering that produced $1.69 billion-the biggest such deal in 2009.
David Katz and Marie LeoneApril 8, 2009

Driven by CFO Holly Koeppel, American Electric Power in little more than a week brought to market the biggest non-IPO stock offering this year-and did it with success in an historically uncertain equities market. The company closed on the oversubscribed March 30 offering of 69 million shares yesterday, garnering the electric utility $1.69 billion. 

Pricing the offering at $24.50 a share, the company went to market expecting to sell 50 million shares. Instead, it came away with the largest secondary offering in any industry so far in 2009, topping Newmont Mining Corporation’s January 28 $1.3 billion offering, according to Dealogic.

Indeed, AEP’s offering was the largest in the utilities industry since 1995, exceeding the three previous top 2009 offerings in the industry combined: Progress Energy, $539 million; Northeast Utilities, $383 million; and Portland General Electric, $176 million, according to the data provider.

Co-led by Credit Suisse Securities and J.P. Morgan Securities, the offering also features Barclays Capital, Citigroup Global Markets, and Morgan Stanley as senior underwriters. “Everybody got a piece because it was big enough for everyone,” says Koeppel.

In part, the offering will go towards redeeming the $300 million in long-term debt the company has coming due this year, she acknowledged. Further, the company will be paying down lines of credit set to mature in 2011 and 2012. The reason, the CFO said, is “to restore liquidity in the event another bump in the road comes along.” The proceeds might also allow AEP to set up a strategy to refinance its 2010 debt maturities.

Why the huge demand for shares of the company? One reason was that once it decided it was going to market, the utility, one of the nation’s biggest electric utilities, put on a full-court marketing press, Koeppel told CFO editors in an interview in New York City today. Two investor-relations teams fanned out, with one going to Boston for face-to-face meetings with investors, while the other made conference calls—as much as 18 in a single day. “We really canvassed the waterfront, and many long-term investors wanted to come in” on the offering, according to the finance chief.

More important was a regulatory decision regarding the company that stemmed from a new utility law in Ohio, a state which claims about 40 percent of the electricity company’s business. That decision enabled the company to quickly produce transparent financials.

The regulatory action created “a level of certainty and removed the overhang or the uncertainty of how much capital we needed and what we were going to get from Ohio,” she said, noting that it gave investors “a view of our capital budget for the three years as well as what we were going to expect from rate relief.”

The utility law, which passed last May and went into effect on July 31, enables the state’s utility regulator (the Public Utilities Commission of Ohio) to require electric power companies to file an “electric security plan.”  Filed on the law’s effective date on July 31, 2008, the AEP plan requested the recovery of costs tied to several items.

In the filing, AEP asked for permission to raise its customers’ rates to pay for: fuel used to generate electricity; electricity purchased on the wholesale market from other utilities; emission allowances; and federally mandated carbon taxes.

On March 18, 2009, the regulator approved AEP’s plan, which will be in effect through Dec. 3, 2011. That set Koeppel and the executives in motion on the accelerated process that led to the stock offering. Because the outcome of the state’s decision on AEP’s plan “was pretty uncertain,” she said, “we didn’t have the ability to narrow the guidance range or provide clarity around both cash flow and earnings for 2009 and beyond.”

Once Koeppel and her team got the order on March 18, they had to digest its meaning.  Since it covers the three-year period of 2009 through 2011, the finance chief said, “it gave us a good long-term view for a big piece of the company.”

With those facts established, the CFO had a choice: she and her staff could rapidly pull together all the company’s financial data while “it was still fresh and beat the first quarter earnings season.”  Or they could to wait until May, when they would have a new batch of financial data to go to market with before the end of the second quarter.

The decision was in favor of a bird in the hand. “We had a one week window, and we went in that window,” she said, contending that the timing decision helped spawn the oversubscription on the equity offering.

To be sure, there has been a big public outcry in Ohio over the possibility that AEP will put its electric security plan in place retroactively and thus collect higher rates from customers starting from January 1, 2009, instead of from March of this year.

Although the state’s public utility regulator approved the retroactive collection, public advocacy groups contend that the plan violates Ohio law. But as of today, the three-year plan that AEP presented to its investors is approved.