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

20091231-0037 FERC PDF (Unofficia1) 12/29/2009
Direct Testimony of Jimmy Addison
Docket ER10· ·000
Page 16 of 19
Exhibit No. seE-1
contractual obligations that a company has, the higher the adjusted interest expense and
2
3
4
5
total adjusted debt and the lower the cash flow coverage ratios. Bond rating agencies
closely analyze these ratios in setting bond ratings for publicly issued debt. In reviewing
these credit measures, rating agencies look at historical and projected ratios. They
detennine the credibility of the projections and the assumptions underlying them.
6 Q.
7
HOW DOES A COMPANY'S CAPITAL STRUCTURE AFFECT ITS CREDIT
RATING?
8 A.
9
10
II
12
13
14
IS
16
The ratio of Total Debt to Total Capitalization provides a long-tenn measure of a
company's financial risk. In general, if a company has more debt, it is considered to be
more financially risky. As the level of debt in the capital structure increases, generally
the level of interest expense that must be serviced increases and that requires higher
levels of operating cash flow to produce adequate levels of interest coverage. The greater
the financial leverage or fixed-charge obligations that a company has, the more volatile is
the company's net cash flow after financing costs and the riskier the company is
financially. For regulated industries, a lower equity ratio will generate less cash flow
assuming the equity return is held constant.
17 Q.
WHAT ARE SCANA'S CASH FLOW METRICS
TODAY AND HOW ARE
18
THOSE METRICS
VIEWED BY RATING AGENCIES?
19 A.
SCANA's FFO/Interest
coverage is 3.4x and its FFOlTotal Debt ratio is 13.8%; its Total
20
21
Debt/Total Capital ratio is 62.5%. This is viewed by the rating agencies as a very
aggressive financial risk profile. According to S&P's most recent ratings report, "The