SCEG OATT Formula Transmission Rate Filing.pdf - SCANA ...

20091231-0037 FERC PDF (Unofficia1) 12/29/2009
Exhibit No. SCE-5(8)
Form 10-K, under the BLRA, SCE&G is allowed to file revised rates with the SCPSC each year to
incorporate any nuclear construction work-in-progress incurred. Requested rate adjustments will be
based on SCE&G's updated cost of debt and capital structure and on an allowed return on common
equity of 11%. On February 11, 2009, the SCPSC approved the initial rate increase of $7.8 million or
0.4% related to recovery of the cost of capital on project expenditures through June 30, 2008. The
company is currently earning a return on the capital employed for the nuclear project, a credit positive.
We do not incorporate a view that 100% of SCE&G's new nuclear investments are "guaranteed"
recovery. Instead, we believe that should the project experience adverse challenges and lor needs to
be abandoned, that the prospect for recovery would result in a lengthy legal and regulatory situation.
At this time, we observe that as the nuclear construction progresses, the nature of the implementation
and support of the BLRA will be key to SCE&G's ongoing credit profile. We expect that the BLRA and
the Public Service Commission of South Carolina (SCPSC) will provide adequate and timely recovery
of the costs associated with the expansion of the V.C. Summer unit into the current rate base? of the
company. Should that view change or difficulties in recovering costs arise, so too could the ratings of
SCE&G.
As SCE&G (Prime-2 short-term rating) continues to move ahead with its significant investment
program, we believe the company will not generate enough cash flow from operations to cover its
planned capital expenditures. In addition, with SCANA management having reiterated its intent to
maintain a dividend payout policy that reflects its projected long term earnings growth expectations, the
parent company will continue to rely on up-stream dividends (roughly $170 million) from its principal
subsidiary, SCE&G. While contractual debt maturities are modest over the next couple of years, the
combined impact of the above factors exposes SCE&G to a greater dependency on external sources of
capital for meeting its funding requirements which could also negatively impact its liquidity.
SCE&G has access to $650 million of consolidated credit facilities ($400 million at SCE&G and $250
million at South Carolina Fuel Company). These credit facilities, maturing in 2011, provide back up
support to both companies' commercial paper programs (SCFC's CP program is guaranteed by
SCE&G). These facilities do not contain any material adverse change language for subsequent
borrowings but do include a debt to capitalization financial covenant (not to exceed 70%). As of March
31, 2009, SGE&G had sufficient headroom available under the financial covenant.
For the latest twelve months ended March 31, 2009, SCE&G generated approximately $413 million in
cash flow from operations, invested roughly $779 million and made an upstream dividend payment to
its parent, SCANA, of roughly $172 million, resulting in $538 million of negative free cash flow. This
compares to $481 million and $222 million of negative free cash flow for the years ended 2008 and
2007, respectively.
Rating Outlook
The negative rating outlook incorporates our view that SCE&G's prospective credit metrics will continue
to be pressured from its historical levels, most likely remaining in the mid-teen's range on a cash flow to
debt basis. The negative outlook also reflects and captures the increasing business risk profile,
primarily due to the magnitude of the new nuclear construc;tion program and the significant negative
free cash flow that is commensurate with such an undertaking. The negative outlook does take into
consideration the supportive regulatory and political environment in South Carolina.
What Could Change the Rating - Up?
Rating upgrades are unlikely over the near to intermediate term horizon due to our expectation that
SCE&G will find it challenging to improve its key financial credit metrics to a level that justifies a ratings
upgrade due to the company's significant capital expenditure plans and rising business risk profile.
What Could Change the Rating - Down?
We believe the company's heightened business risk profile can be reasonably well mitigated if the
company's financial profile was more reflective of the average financial profile for peer companies that