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 CFO.com 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 CFO.com 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.