NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' Issuer Default Rating (IDR) of Xcel Energy, Inc. (XEL). In addition, Fitch has affirmed the 'A-' IDRs of Public Service Company of Colorado (PSCo), Northern States Power Minnesota (NSPM), Northern States Power Wisconsin (NSPW), and the 'BBB' IDR of Southwestern Public Service Company (SPS). The debt instrument ratings are also being affirmed and are listed at the end of this release. The Rating Outlook is Stable for all entities.
KEY RATING DRIVERS FOR XCEL ENERGY
Favorable Rate Outcomes: The utility subsidiaries received relatively favorable regulatory decisions in the latest series of rate cases, notably in Colorado where PSCo operates in the final year of a three-year electric rate plan that mitigates rate lag and provides regulatory predictability through 2014. In Texas, SPS reached a favorable settlement in its pending rate case which would result in a $37 million electric base rate increase, approximately 76% of SPS's net rate request. Interim rates became effective in October 2014 and a commission decision is expected by the end of 2014. In Wisconsin, NSPW and the Public Service Commission of Wisconsin (PSCW) staff reached an agreement that would result in a $16.1 million electric base rate increase, approximately 78% of NSP-W's initial rate request. A decision by the PSCW is expected by December 2014 with new rates effective January 2015. The Texas and Wisconsin rate settlements are in line with Fitch's expectations.
Regulatory Risk in Minnesota: Fitch's rating concerns for XEL include the regulatory risk associated with NSPM's Minnesota pending rate case and the prudence review related to cost overruns at the Monticello nuclear plant. Fitch believes NSPM's pending rate proceeding carries some level of regulatory uncertainty particularly in light of the last rate order which was less constructive than what Fitch had originally anticipated and materially below what NSPM had received in past orders. In its revised request, NSP-M is seeking an electric base rate increase of $142.2 million in 2014 with a step increase of $106 million in 2015, based on a 10.25% return on equity (ROE). NSPM's filing is the first rate proceeding under which the Minnesota Public Utility Commission (MPUC) is considering a multi-year rate request, which adds some level of regulatory uncertainty, in Fitch's view. Securing multi-year rate plans in Minnesota is critical to management's long-term strategy of improving its earned ROE within the next five years.
Fitch does not expect a potential disallowance on Monticello cost overruns to have a material impact on consolidated credit metrics. NSPM completed the Monticello life extension and 71MW power uprate project in 2013 for a total cost of approximately $665 million, which was significantly higher than the initial estimate of $320 million in 2008. In July 2014, the Minnesota Department of Commerce (DOC), the main intervener in the case, recommended a disallowance of approximately $71.5 million of project costs. A decision on the prudence review is expected to be made within the context of the pending rate case with a final rate order in the second quarter of 2015 (2Q'15).
Colorado Pending Rate Case: PSCo filed for an annual electric base rate increase of approximately $136 million based on a 10.35% ROE and a 56% common equity ratio. The rate request reflects cost recovery of approximately $100.9 million associated with the Clean Air Clean Jobs Act (CACJ) project which is expected to be completed by 2017. PSCo also proposed to implement a CACJ rider that would recover approximately $34.2 million in 2016 and $29.9 million in 2017. It is Fitch's expectation that PSCo will be able to secure another multi-year rate plan that provides regulatory predictability through 2017. Interim rates subject to refund are to be effective February 2015 with a final rate order expected in 2Q'15.
Elevated Capex: Consolidated capital expenditures remain elevated over the forecast period. Capex is projected to amount to approximately $17.5 billion over 2014-2019 compared with approximately $14.3 billion spent over the previous six years. Management forecasts that about 69% will be allocated to NSPM and PSCo, and earmarked primarily for transmission and generation, which represent approximately 31% and 23% of consolidated capex, respectively. The projected $17.5 billion of consolidated capex spending does not include any Transco-related investments.
XEL formed two Transco entities in 2014 that will compete in the context of FERC 1000 order for transmission projects in the SPP region starting in 2015 and MISO regions, starting in 2015 or 2016. The Transcos have filed for forward-looking transmission formula rates treatment with FERC and a decision is expected by the end of 2014. Both Transcos requested a capital structure based on 55% equity and 45% debt.
Fitch believes the formation of the Transco entities is credit neutral to XEL at this time.
Stable Credit Metrics: For the latest 12 months (LTM) ended Sept. 30, 2014, funds from operations (FFO)-fixed charge coverage stood at 5.2x, FFO lease-adjusted leverage at 4x, and adjusted debt/EBITDAR at 4.3x. Fitch forecasts credit metrics to remain near existing levels with FFO-fixed charge coverage averaging 5x, FFO-lease adjusted leverage, 4.2x, and adjusted debt/EBITDAR, 4.3x, over 2014-2017. Fitch's Base Case projections reflect rate outcomes at NSP-M and PSCo that are consistent with most recent rate orders. Fitch has not assumed any disallowance associated with the Monticello costs overruns. FFO metrics are further supported by tax benefits stemming from the utilization of Net Operating Losses (NOLs) at XEL.
Conservative Business Model: XEL's rating affirmation reflects the relatively stable operating cash flows of its operating subsidiaries and the financial support it receives from them in the form of dividends for the payment of corporate expenses, debt service obligations, dividends to common shareholders, and for other business matters. XEL's low-risk regulated utility subsidiaries benefit from relatively constructive regulatory frameworks across multiple jurisdictions and exhibit limited fuel and commodity price risk due to the ability to recover fuel and purchased power via separate cost trackers. XEL provides equity funding to its subsidiaries to support their long-term growth and to optimize their capital mix within a target range. XEL strategy continues to be focused on successfully managing rate cases and reducing regulatory lag.
Adequate Liquidity: XEL has adequate liquidity to meet short-term funding needs. Total consolidated borrowing capacity amounted to $2.45 billion under five separate five-year bank credit facilities at Sept. 30, 2014. In October 2014, XEL renewed its bank credit facilities and increased total borrowing capacity to $2.75 billion with a maturity date of October 2019. At Sept. 30, 2014, XEL had $138 million of cash and cash equivalents and $1,682 million of unused facilities. XEL also support liquidity needs of its operating subsidiaries through equity infusions and participates in a company money pool where it can lend but not borrow funds from the pool. Consolidated debt maturities are considered manageable with $250 million due in 2015, $650 million due in 2016, (including $450 million of XEL long-term debt) and $384 million due in 2017. Fitch expects XEL to continue to enjoy ample access to capital markets and refinance long-term debt maturities when due.
Standard Notching: There is a moderate to strong linkage between the IDRs of XEL and each of its subsidiaries. The linkages originate primarily from strategic drivers. Each subsidiary is important to XEL and the parent financially supports its subsidiaries when warranted via equity infusions and funding into the inter-company money pool. Fitch generally maintains a one-to-two notch differential between parent holding company and utility subsidiaries. Notching can be widened in instances where some form of ring-fencing provisions exists and/or the parent holding company can demonstrate its commitment or ability to support utility's credit metrics, as seen with XEL. As a result, Fitch believes a one to two notch differential between the IDRs of XEL and its subsidiaries is appropriate.
RATING SENSITIVITIES
Positive:
Funding of a large multi-year capital investment plan and the uncertainty associated with the outcome of pending rate proceedings in Minnesota and Colorado limit prospects for a positive rating action in the near term.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A deterioration in the regulatory compacts of Colorado or Minnesota that result in an inability to successfully execute and adequately recover large capital investments at the utilities;
--Adjusted debt/EBITDAR weakening to 4.6x on a consolidated basis; and
--A more aggressive dividend policy adopted by management that result in parent-level incremental leverage or a reduction in parental equity support to the utilities in the midst of heavy capex. Fitch notes XEL's dividend payout ratio is below industry average.
KEY RATING DRIVERS FOR PUBLIC SERVICE CO. OF COLORADO
Pending Rate Case: PSCo filed for an annual electric base rate increase of approximately $136 million based on a 10.35% ROE and a 56% common equity ratio. The utility currently operates under a multi-year rate plan that provides regulatory predictability and cash flow visibility through 2014. The multi-year rate plan provided a total of $124 million of base rate increases, including a $25 million rate hike effective January 2014. PSCo has historically done well in rate proceedings, consistently receiving more than 50% of rate requests. In its Base Case scenario, Fitch has assumed a rate outcome that is in line with the last rate decision, including the ability to secure another multi-year rate plan that would provide regulatory predictability through 2017. A less than balanced rate order would be an adverse credit factor.
Elevated Capex: Fitch expects capex to remain elevated throughout the forecast period. Management plans on spending a total of approximately $5.53 billion over 2014-2019, which is higher than historical norms. Key drivers of capex include investments associated with the Clean Air Clean Jobs Act (CACJA), projects related to gas pipeline integrity, and enhancement of the distribution system. The CACJA projects include the shutdown of over 900MW of coal generation, the addition or conversion of over 900MW of natural gas generation, and the installation of pollution control equipment on over 700MW of coal generation. Overall project is expected to be completed by 2017 and management expects to spend approximately $340 million over the forecast period. Estimated costs related to natural gas pipeline replacement projects amount to approximately $665 million over the next five years.
Favorable Regulatory Compact: PSCo expects to recover capex via rate cases, and recovery through a rider mechanism is also allowed by the CPUC. For natural gas pipeline replacement projects, PSCo can recover its costs through a natural gas pipeline integrity rider, which reduces the impact of regulatory lag on operating cash flows during the investment phase. Other constructive rate design mechanisms include the use of forward-looking test years, energy and natural gas cost trackers, and multiple riders for transmission and CACJ-related investments, minimizing rate lag.
Strong Credit Metrics: For the LTM ended Sept. 30, 2014, FFO fixed-charge coverage was 6.7x, FFO lease-adjusted leverage, 3.3x and adjusted debt/EBITDAR at 3.6x. Fitch forecasts FFO fixed-charge coverage to average 5.7x, FFO-lease adjusted leverage, 3.9x, and adjusted debt/EBITDAR, 3.4x, over 2014-2017, in line with target ratios for an 'A-' rated utility company. The cash flow metrics reflect the phase-out of bonus depreciation in 2014.
Fitch expects PSCo to finance capex in a manner that is consistent with its currently authorized capital structure, using a mix of internally generated cash flows, long-term debt issuances, and parent equity infusions. Fitch views parent support as credit positive for PSCo. Fitch projects internally generated cash flows to fund approximately 60% of capex over the forecast period.
Adequate Liquidity: Fitch considers PSCo to have adequate liquidity to meet its short-term obligations. The company has access to a total of $700 million under a bank credit facility that expires in July 2017. The credit facility was recently renewed with the maturity date extended to October 2019. At Sept. 30, 2014, PSCo had $452 million of available liquidity, including $441 million of unused facilities and $11 million of cash and cash equivalents. Further strengthening liquidity, PSCo participates in a money pool with its utility affiliates NSPM and SPS. PSCo's maximum borrowing limit under the money pool is $250 million, which was fully available at Sept. 30, 2014. PSCo's long-term debt maturities are considered manageable with $130 million due in 2017 and $300 million due in 2018. Fitch expects PSCo to continue to enjoy ample access to the debt capital markets to fund ongoing capex and refinance long-term debt maturities as they become due.
RATING SENSITIVITIES
Positive:
Given the projected sizeable capital spending, future positive rating actions are unlikely in the near term.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A less than balanced outcome in PSCo's pending rate case;
--Adjusted debt/EBITDAR weakening to 4x; and
--A shift in management strategy that results in weaker financial support from XEL.
KEY RATING DRIVERS FOR NORTHERN STATES POWER MINNESOTA
Balanced Regulation: Utility rate design is enhanced by the timely recovery of fuel and purchased power costs in all three jurisdictions. Additionally, the utilities have riders that facilitate timely recovery of environmental, renewables, and transmission-related capital investments. Utility credit quality is further enhanced by regulatory mechanisms that include the use of forward-looking test years in Minnesota and North Dakota, and the ability to file for multi-year rate plans in Minnesota following an order by the Minnesota Public Utility Commission (MPUC) in June 2013. The multi-year plan is filed as part of a general rate case and can be used for the recovery of costs related to specific capital projects and appropriate non-capital projects. A stay-out provision is in effect during the multi-year term.
Uncertainty Around Pending Rate Case: Fitch expects the request for recovery of cost overruns associated with the Monticello life extension and extended power uprate project to be a focal point of the case. The Monticello life extension and 71MW power uprate project was completed in 2013 for a cost that was more than double NSPM's initial estimates. A decision on the prudence review is expected to be made within the context of the pending rate case with a final rate order in 2Q'15. A balanced rate outcome will be critical towards maintaining the existing credit profile.
Elevated Capex: NSPM plans on spending a sizeable $6.51 billion over 2014-2019. Peak of capital spending occurs in 2015 and amounts to approximately $1.62 billion, including $575 million associated with wind investments. Capex is primarily driven by investments in infrastructure, transmission stemming from the CapX2020 project, renewable energy including recently approved owned wind generation, and nuclear generation. NSPM has transmission and renewable riders that facilitate timely recovery of capital investments.
Robust Credit Metrics: For the LTM ended Sept. 30, 2014, FFO fixed charge coverage stood at 6.8x, FFO lease-adjusted leverage at 3.2x, and adjusted debt/EBITDAR at 3.7x. Fitch forecasts FFO fixed charge coverage to average 6.2x, FFO lease-adjusted leverage, 3.3x, and adjusted debt/EBITDAR, 3.6x over 2014-2017. The FFO metrics include the favorable impact of production tax credits associated with the utility's wind investments in 2015. Fitch's projections do not include any cost recovery disallowance related to the Monticello project. Fitch believes there is enough room in the credit metrics to absorb any potential disallowance.
Fitch expects capex to be funded in a manner consistent with the utility's authorized regulatory capital structure (52.56% common equity ratio), including a mix of internally generated funds, long-term debt issuances, and parent equity infusions. Fitch projects internally generated cash flows to fund approximately 75% of capex over 2014-2017.
Low-Risk Business Model: NSPM's ratings reflect the low-risk nature of its regulated utility business that operates in what Fitch considers to be balanced regulatory regimes across the regulatory jurisdictions of Minnesota, North Dakota, and South Dakota. Fitch notes Minnesota represents approximately 88% of NSPM's earnings and is the main driver of the utility's financial performance.
Adequate Liquidity: NSPM has adequate liquidity to meet its short-term funding obligations with access to a total of $500 million under a bank credit facility that expires in July 2017. The bank facility was recently renewed with the maturity date extended to October 2019. At Sept. 30, 2014, there was $568 million of available liquidity, including $476 million of unused facilities and $92 million of cash on hand. Liquidity is also available through participation in a money pool with its utility affiliates PSCo and SPS. NSPM has a borrowing limit of $250 million, which was fully available at Sept. 30, 2014. NSPM can receive funds from XEL but cannot lend to it under the money pool arrangement. Long-term debt maturities are manageable with $250 million due in 2015 and $500 million due in 2018. Fitch expects NSPM to continue to enjoy ample access to the debt capital markets to fund capex and refinance existing long-term debt.
RATING SENSITIVITIES
Positive:
Given the uncertainty on the outcome of the Minnesota pending rate case and sizeable capex, a positive rating action is unlikely in the near term.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A rate outcome in the pending rate case that is inconsistent with recent rate orders and significantly below Fitch's expectations;
--Adjusted debt/EBITDAR weakening to 4x; and
--A shift in management strategy that results in weaker financial support from XEL.
KEY RATING DRIVERS FOR NORTHERN STATES POWER WISCONSIN
Supportive Regulatory Compact: NSPW's ratings reflect the constructive regulatory framework in Wisconsin with rate design mechanisms that are supportive of credit quality, and characterized by above-average authorized ROEs, forward looking test years, purchased gas adjustment clause and annual filings for fuel and purchased energy adjustments.
NSPW reached a constructive agreement with the Public Service Commission of Wisconsin (PSCW) Staff and other parties in the utility's pending rate case. Under the agreement, NSPW's electric base rates will increase by $16.1 million, representing approximately 78% of the utility's initial request. The recommendation is based on a 10.2% ROE and a 52.54% common equity ratio. New rates are to be effective January 2015. The outcome is in line with Fitch's prior expectations. A final decision by the PSCW is expected by the end of 2014.
Elevated Capex: Fitch's main rating concern relates to the relatively sizeable capital spending program over the forecast period. NSPW plans on spending a total of approximately $1.72 billion over 2014-2019, significantly higher than historical norms. Capex is primarily earmarked for transmission spending, including NSPW's Wisconsin portion of the CapX2020 transmission project.
Stable Credit Metrics: For the LTM ended Sept. 30, 2014, FFO fixed charge coverage stood at 4.5x, FFO lease-adjusted leverage at 3.3x, and adjusted debt/EBITDAR, 3x. Fitch forecasts FFO fixed charge coverage to average 6x, FFO lease-adjusted leverage, 3.5x, and adjusted debt/EBITDAR, 3.3x, over 2014-2017. The forecasted metrics reflect the expiration of bonus depreciation in 2014 and peak spending in the 2016-2017 time frame.
Fitch expects NSPW to fund capex in a manner that is consistent with its authorized regulatory capital structure (52.54% common equity ratio), with a mix of internally generated funds, long-term debt issuances, and parent equity infusions. Fitch views the parent support as credit positive for NSPW.
Adequate Liquidity: NSPW has adequate liquidity to meet its short-term obligations with access to a total of $150 million under a bank credit facility that expires in July 2017. At Sept. 30, 2014, total available liquidity was $144 million, including $142 million of unused facilities and $2 million of cash on hand. There are no long-term debt maturities prior to 2018 when $150 million becomes due.
RATING SENSITIVITIES
Positive:
Given the projected elevated capex, a positive rating action is unlikely in the near term.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A deterioration of the Wisconsin regulatory compact;
--Adjusted debt/EBITDAR weakening to 3.75x; and
--A shift in management strategy that results in weaker financial support from XEL.
KEY RATING DRIVERS FOR SOUTHWESTERN PUBLIC SERVICE CO.
Low Risk Business Model: SPS's ratings are supported by its low-risk regulated utility businesses that operate in the regulatory jurisdictions of Texas and New Mexico. Texas is the main driver of financial performance. Rate design mechanisms include fuel and purchased power recovery mechanisms that limit commodity risk in both jurisdictions. SPS has also riders for transmission and distribution costs in Texas. Nonetheless, Fitch considers those regulatory regimes to be challenging from a bondholder perspective, primarily due to the reliance on historic test years in the rate setting process, as well as due to authorized electric ROEs that have been below industry average over recent years. That being said, SPS has done relatively well in recent rate cases with balanced outcomes in both Texas and New Mexico.
Constructive Texas Rate Settlement: SPS reached a constructive settlement agreement with the staff of the Public Utility Commission of Texas (PUCT), the Texas Industrial Energy Consumers, the Office of Public Counsel and other parties in September 2014 which would increase retail electric rates by $37 million (approximately 70% of initial rate request) retroactive to June 1, 2014. The settlement is silent with respect to rate of return and other traditional parameters. Management indicated in its 3Q earnings call that it plans on filing a Texas rate case in December 2014 to recover recent capital investments. Continued balanced decisions in rate cases will be critical toward maintaining SPS's existing rating profile.
Balanced New Mexico Rate Order: The New Mexico Public Regulation Commission (NMPRC) authorized SPS an electric rate increase, effective April 5 2014, of approximately $33.1 million, consistent with Fitch's Base Case projections. The order was based on a 9.96% ROE, a 53.89% common equity ratio, and a 2014 forecasted test year. Favorably, Fitch notes SPS's rate case was the first proceeding under which the NMPRC applied a forward-looking test year, as permitted by Senate Bill 477 that was enacted in 2009.
Elevated Capex: SPS plans on spending a sizeable $3.17 billion over 2014-2019, with capex peaking in 2016 and 2017. Capital spending is earmarked primarily for transmission investments in the Texas Panhandle and eastern New Mexico, representing approximately 57% of total capital spending. SPS is experiencing rapid sales growth in its service territory due to its attractive location near oil shale plays and demand from the oil and gas exploration industry.
Modest Weakening in Credit Metrics: For the LTM ended Sept. 30, 2014, FFO fixed charge coverage stood at 5.1x, FFO lease-adjusted leverage at 3.3x, and adjusted debt/EBITDAR at 3.5x. Fitch forecasts FFO fixed charge coverage to average 4.8x, FFO lease-adjusted leverage, 3.9x, and adjusted debt/EBITDAR, 3.8x, over 2014-2017, well in line with Fitch's target ratios for a 'BBB' rated utility. Balanced outcomes in regulatory proceedings and effective cost control management will continue to be critical towards maintaining current ratings.
Fitch expects the utility to fund capex requirements with a balanced mix of internally generated funds, long-term debt, and parent equity infusions. Fitch views the parent support as credit positive for SPS.
Sufficient Liquidity: SPS has access to $300 million of total available capacity under a five-year bank credit facility that expires July 2017. In October 2014, SPS renewed its credit facility and increased borrowing capacity to $400 million with a maturity date of October 2019. As of Sept. 30, 2014, there was $260 million of available liquidity, including $259 million of unused facilities and $1 million of cash on hand. SPS has access to additional liquidity through its participation in an inter-company money pool. SPS has a borrowing limit of $100 million, and the full amount was available at Sept. 30, 2014. Fitch considers long-term debt maturities to be manageable with $200 million due in 2016 and $250 million due in 2018.
Fitch has also revised the rating on SPS's 8.75% $250 million Series G senior unsecured note to 'A-' from 'BBB+'. The rating revision is triggered by the Series G notes becoming secured and pari passu with SPS's first mortgage bonds pursuant to the negative pledge clause in its indenture. On June 9, 2014, SPS closed on its issuance of $150 million of 3.3% first mortgage bonds, Series 3 due 2024. The issuance raised the amount of SPS's first mortgage debt outstanding to $550 million, which exceeded the 15% of capitalization covenant under the negative pledge clause in the Series G Fifth Supplemental Indenture. The clause states that any additional secured debt issued by SPS cannot exceed the greater of 15% of their capitalization or 15% net tangible assets without equally and ratably securing the Series G notes.
RATING SENSITIVITIES
Positive:
Given the projected elevated capex, a positive rating action is unlikely in the near term.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Unfavorable regulatory developments including the inability to timely and adequately recover costs associated with a large capex program;
--Adjusted debt/EBITDAR greater than 4.5x on a sustained basis; and
--A shift in management strategy that results in weaker financial support from XEL.
Fitch has affirmed the following ratings with a Stable Outlook:
XEL
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Short-term IDR and commercial paper (CP) at 'F2'.
PSCo
--IDR at 'A-';
--Senior secured debt at 'A+';
--Short-term IDR and CP at 'F2'.
NSPM
--IDR at 'A-';
--Senior secured debt at 'A+';
--Short-term IDR and CP at 'F2'.
NSPW
--IDR at 'A-';
--Senior secured debt at 'A+';
--Senior unsecured debt at 'A';
--Short-term IDR and CP at 'F2'.
La Crosse (WI) (NSP-WI)
--Unsecured resource recovery refunding revenue bonds at 'A'.
SPS
--IDR at 'BBB';
--Senior secured debt at 'A-'
--Senior unsecured debt at 'BBB+';
--Short-term IDR and CP at 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);
--'Rating U.S. Utilities, Power and Gas Companies' (March 11, 2014);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813608
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=929955
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