Fitch Rates Public Service Co. of Colorado's $250MM Sr. Secured Notes 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to Public Service Company of Colorado's (PSCo) new 2.90% $250 million issuance of first mortgage bonds (FMBs) series No. 28 due May 15, 2025. The new FMBs will rank equally with PSCo's existing senior secured obligations. Net proceeds will be used for general corporate purposes, including the repayment of short-term debt and the funding of the utility's capital expenditure program.

KEY RATING DRIVERS

Constructive Electric Rate Order: The multi-year rate order provides regulatory predictability through 2017 and is consistent with Fitch's prior expectations and previous rate decisions. The order reflects a total electric net rate increase of about $53 million in 2015, including a base rate reduction of approximately $39.4 million and rate increases of approximately $112.6 million via forward-looking riders associated with the state's Clean Air Clean Jobs Act (CACJA) and transmission expenses. The order also reflects an additional CACJA step-up increase of $25 million in 2016 and a decrease of $4 million in 2017. The CACJA rider enhances PSCo's cash flows by providing for a cash return on CWIP on environmental expenditures. The rate outcome was based on a 9.83% return on equity (ROE) and a healthy equity component of 56%. The authorized ROE was slightly below the average ROE granted nationwide in 2014.

Elevated Capex: Fitch expects capex to remain elevated throughout the forecast period. Management plans on spending a total of approximately $4.48 billion over 2015-2019, which is higher than historical norms. Key drivers of capex include investments associated with the 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.

Pending Gas Rate Case: PSCo filed a multi-year rate request to increase base rates by $40.5 million in 2015, with additional step-up increases of $7.6 million in 2016 and $18.1 million in 2017. Concurrently, the utility is requesting an extension of its pipeline integrity rider through 2020, which would provide incremental revenues of $21.7 million in 2016 and $21.2 million in 2017. A decision by the Colorado Public Utility Commission (CPUC) is anticipated in the fourth quarter of 2015. Fitch expects a balanced rate decision in the pending case. Approval of a multi-year plan in the gas business would be supportive of PSCo's credit profile as it would provide regulatory predictability through 2018.

Favorable Regulatory Compact: Constructive rate design mechanisms include the use of multi-year rate plans, energy and natural gas cost trackers, and multiple riders for transmission and CACJ-related investments, minimizing rate lag. 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.

Adequate Credit Metrics: For the year ended Dec. 31, 2014, funds from operations (FFO) fixed-charge coverage was 6.9x, FFO lease-adjusted leverage, 3.3x and adjusted debt/EBITDAR at 3.6x. Fitch forecasts FFO fixed-charge coverage to average 5.4x and adjusted debt/EBITDAR, 3.5x, over 2015-2019, 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 65% of capex over 2015-2019.

Solid Liquidity: The company has access to a total of $700 million under a bank credit facility that expires in October 2019. At March 31, 2015, PSCo had $554 million of available liquidity, including $551 million of unused facilities and $3 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 March 31, 2015. 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.

KEY ASSUMPTIONS

--1% sales growth;

--Multi-year electric rate plan through 2017;

--Capex as projected by management;

--2% base O&M growth.

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:

--Adjusted debt/EBITDAR weakening to 4x;

--A shift in management strategy that results in weaker financial support from XEL.

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=863298

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984158

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Contacts

Fitch Ratings
Primary Analyst
Philippe Beard
Director
+1-212-908-0242
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Roshan Bains
Director
+1-212-908-0211
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
or
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Philippe Beard
Director
+1-212-908-0242
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Roshan Bains
Director
+1-212-908-0211
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com
or
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com