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Q&A: Steven Nichols, Southern Co.

Southern Power became the first U.S. investment grade utility to price a green bond in November, with a $1 billion dual-tranche offering. Last week, PFR editor Richard Metcalf caught up with Steven Nichols, capital markets manager at the issuer’s parent, Southern Co., to discuss the rationale behind the deal, its success, and the potential for more of the same.

PFR: Southern Power’s green bond seemed like a very successful deal on a day when there was quite a bit of issuance from other similar companies. Can you comment on that to begin with?

NICHOLS: Sure, we were very happy with the result of the transaction. There were four other utilities in the market in addition to Southern Power and we knew it would be a day to compete for capital. We think that having a green bond out there gave us a little bit of something different in the market and did help us to achieve our fundraising goals. We got a good response from investors both in the U.S. and abroad.

PFR: I heard that the deal was oversubscribed. Can you elaborate on that?

NICHOLS: We ended up with a total order book of $4.8 billion, so we were - for our original issuance level – we were almost seven times oversubscribed.

PFR: And presumably that helped with getting some momentum on the pricing as well?

NICHOLS: Certainly.

PFR: So how long has Southern Co. or Southern Power been considering issuing a green bond?

NICHOLS: It’s been something we’ve been thinking about for nearly a year, and actively pursuing and working on for several months.

PFR: Including an in-depth investor education process?

NICHOLS: We did have a green investor update several weeks before we announced this issuance, to give them an update on the progress that Southern Power has been making with respect to its green acquisitions and to share with them some of the positive environmental impacts that are resulting from that.

PFR: What were your main reasons for wanting to issue a green bond?

NICHOLS: I would say there were three. I work in the treasury department, so for us it was about broadening our investor base, tapping into the socially responsible investment community as an additional source of funding, since Southern Power has a significant growth plan that they are executing on right now. We also thought it would be a great opportunity to highlight Southern Power’s growth in renewable energy. News articles have given us an opportunity to do that and given others in the company something to point to to really emphasize the growth in that avenue for Southern Power. Finally, we saw this as an opportunity to position Southern Company as a leader in innovation within the financing of renewables projects.

PFR: There have been a couple of utilities in Europe that have issued green bonds in euros. Was that something you looked at as a model?

NICHOLS: We were certainly aware of those, as well as several previous corporate green bond issuances in the U.S., and we definitely looked to all those for some guidelines in terms of the use of proceeds language and the actual structure of the bond.

PFR: You said that one of the reasons behind the bond was that you wanted to broaden your investor base. Can you provide any details on how many new investors you saw placing orders?

NICHOLS: It’s a little bit difficult to say exactly how many are new. Our records on who’s participated in our bonds only go back so far. But I think it’s safe to say dozens of new investors.

PFR: You also mentioned that you had investors from the U.S. and abroad. I heard this was also a new kind of deal for Southern Power in that it was offered to European investors for the first time. Is that correct?

NICHOLS: That is correct. Historically we’ve only cleared our bonds through Depository Trust & Clearing Corp. Investors have to have a U.S. office in order to do that. We structured this a little bit differently so that we could clear through some of the European exchanges and were able therefore to offer it to some European investors. That helped as well.

PFR: How popular was the bond with European investors?

NICHOLS: We had over 15% of the allocations in the end go to investors in Europe, which is very unusual for us. I can’t prove it but I suspect that the green bond helped with that.

PFR: When I was talking with Suzanne Buchta of Bank of America Merrill Lynch (the lead green structuring agent on the deal), she suggested that green investors were more willing to look at currencies or regions that they wouldn’t normally invest in when it came to a green bond.

NICHOLS: I can’t prove that it being green bond helped with that, but the green bond community is further developed in Europe and socially responsible investing is more at the forefront of the investing community so I do think it was beneficial for that.

PFR: In terms of pricing, there have been discussions about whether green bonds should be able to be priced inside an issuer’s vanilla curve, perhaps because there’s more demand, but some investors say that the credit risk is the same and therefore they should price accordingly. Do you feel that you got better pricing on this deal because it was a green bond?

NICHOLS: It’s a tough question. I think the green investors certainly want to ensure that they get an appropriate return. I don’t think we got pricing that was out of line with our standard curve. I think that we may have saved a couple of basis points. I personally believe that we did, but it’s very difficult to prove that.

One thing I will just mention is that the largest allocation that we had did go to a green investor, which I found personally surprising.

PFR: And when you say a green investor…

NICHOLS: It was a green fund at a broader investment house.

PFR: So a positive experience, and one that you may repeat?

NICHOLS: I can’t comment about future funding plans for Southern Company but the success of this transaction certainly didn’t hurt the prospects of doing another green bond.

PFR: You can probably comment even less on the future funding plans of your peers but I suppose people in the markets are waiting to see if other utilities follow Southern Company and decide to issue their own green bonds?

NICHOLS: We will be watching that closely and are interested to see how they go, if anyone does choose to offer one.

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