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

20091231-0037 FERC PDF (Unofficia1) 12/29/2009
Direct Testimony of Jimmy Addison
Docket ERIO- -000
Page 150fl9
Exhibit No. SeE-I
A.
No. Financial risk from an equity investor's point of view is different. Financial risk is
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the risk resulting from the fact that debt holders are paid first before any payments can be
made to equity holders. Credit ratings are focused upon whether there is sufficient cash
flow to make the required interest and principle payments on debt, but credit ratings are
not a measure of the adequacy of cash flow to equity holders. Of course, a higher ROE
provides higher cash flow to support the Company's credit rating, but an investment
grade credit rating itself is not evidence that the allowed ROE is adequate compensation
for the business and financial risk being borne by the equity holders.
9 Q.
HOW DO RATING AGENCIES
ASSESS CASH FLOW?
10 A.
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The two primary cash flow metrics used by all ofthe credit rating agencies to assess
financial risk are the ratio of Funds from Operations ("FFO") to Interest Expense
("FFO/Interest") and the ratio of Funds from Operations to Total Debt ("FFOlTotal
Debt").
14 Q.
HOW DO RATING AGENCIES DETERMINE FFO?
15 A.
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FFO is computed by taking Cash from Operations from the company's Statement of Cash
Flows and adding to that, changes in Working Capital to get a true sense of the cash
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provided by the company's operations.
The two largest income statement items that are
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included in FFO are net income and depreciation expense. The higher a company's net
income and depreciation expense, the higher a company's FFO will be. As a result, the
authorized ROE and determinations regarding depreciable plant lives have a significant
impact on the critical cash flow coverage ratios. The more debt and other fixed-charge