Fitch Rates Northern States Power Company-Minnesota's FMBs 'A+'

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to Northern States Power Company-Minnesota's (NSP-Minnesota) $600 million issuance of first mortgage bonds (FMBs), composed of two $300 million tranches. The 2.20%, 5-year FMBs maturing Aug. 15, 2020 and the 4.00%, 30-year FMBs maturing Aug. 15, 2045 will rank pari passu with NSP-Minnesota's existing secured debt. The expected settlement date for the FMBs is next Tuesday, August 11.

The Rating Outlook is Stable.

Net proceeds will be used for the repayment or redemption of the company's $250 million, 1.95% FMBs due Aug. 15, 2015, repayment of short-term debt, and for other general corporate purposes.

KEY RATING DRIVERS

Balanced Regulation

NSP-Minnesota's ratings reflect a relatively balanced and stable regulatory environment across three states, and Fitch expects reasonable outcomes to future rate case filings. Supportive regulatory mechanisms include fuel cost and purchased power adjustments and capital investment riders for environmental improvement, renewable generation, and electric transmission.

Minnesota Electric Rate Order

Fitch believes the Minnesota Public Utilities Commission's (MPUC) recent rate order is slightly punitive with respect to the low authorized return on equity (ROE) of 9.72% and the Monticello nuclear plant uprate and life extension project ruling. The MPUC disallowed a return on $333 million of cost overruns and determined the project is not used-and-useful until approved by the Nuclear Regulatory Commission (NRC).

The electric rate order will somewhat weaken NSP-Minnesota's credit metrics over the near term. However, Fitch considers the overall regulatory environment in Minnesota to remain supportive of credit quality, as evidenced by a balanced rate increase, the authorized 52.5% equity capital structure, and the implementation of a revenue decoupling pilot program.

Capex Peaking in 2015

NSP-Minnesota is nearing the end of a large, multi-year capex program, having spent an average of $1.25 billion per year over 2011-2014. The utility is expected to spend $1.625 billion in 2015, not including an additional $300 million over 2015-2016 on the 200-MW Courtenay wind project that is pending regulatory approvals. In 2016, capex is expected to return to more modest levels, averaging $950 million per year over 2016-2019, excluding potential costs in 2016 related to the Courtenay wind project.

Robust Credit Metrics

For the LTM ended June 30, 2015, funds from operations (FFO) fixed-charge coverage stood at 6.5x, FFO-adjusted leverage at 3.2x, and adjusted debt/EBITDAR at 4.1x. Fitch forecasts FFO fixed-charge coverage to average 6.2x, FFO-adjusted leverage 3.3x, and adjusted debt/EBITDAR 3.6x over 2015-2018. The FFO metrics include the favorable impact of production tax credits associated with the utility's wind investments in 2015 and the negative impact of an end to bonus depreciation.

Parent Support

Fitch views the relationship between NSP-Minnesota and its parent, Xcel Energy Inc. (Xcel; 'BBB+'/Stable Outlook), as a credit positive for the utility. Xcel provides equity funding to NSP-Minnesota to support its long-term growth and to optimize its capital mix within an appropriate targeted range. Xcel's strategy continues to be focused on successfully managing rate cases and reducing regulatory lag.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for NSP-Minnesota include:

--Electricity sales growth averaging 0.4%;

--O&M expense growing at 3%;

--No reinstatement of bonus depreciation;

--EBITDA growth averaging 8%;

--Rate case outcomes consistent with historical rate orders.

RATING SENSITIVITIES

Positive: Given the disallowance of certain returns on the Monticello plant, a positive rating action is unlikely in the near term, but could occur if adjusted debt/EBITDAR were to improve to 3.0x and FFO-adjusted leverage to 3.2x on a sustained basis.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include a material deterioration of the regulatory environment in Minnesota; adjusted debt/EBITDAR weakening to 4.0x on a sustained basis; and a shift in management strategy that results in weaker financial support from Xcel.

LIQUIDITY

Fitch considers NSP-Minnesota's liquidity to be adequate. NSP-Minnesota primarily meets its short-term obligations through the issuance of commercial paper (CP) under its $500 million revolving credit facility, which expires in October 2019. At June 30, 2015, NSP-Minnesota had $117 million of CP issued and $26.5 million of letters of credit drawn, leaving $356.5 million of availability under this five-year unsecured facility.

Liquidity is also available through participation in a money pool with its sister utilities Public Service Company of Colorado (PSCo; 'A-'/Stable Outlook) and Southwestern Public Service Company (SPS; 'BBB'/Stable Outlook). NSP-Minnesota has a borrowing limit of $250 million, which was fully available at June 30, 2015. As is typical for a utility, NSP-Minnesota's operations require modest cash on hand, and the utility had $72 million as of June 30, 2015, all of which was unrestricted.

There are no long-term debt maturities until March 2018, when $500 million of 5.25% FMBs comes due.

Date of Relevant Rating Committee: April 21, 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Recovery Ratings and Notching Criteria for Utilities (pub. 05 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

Additional Disclosures

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989066

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst:
Kevin L. Beicke, CFA, +1-212-908-0618
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Philippe Beard, +1-212-908-0242
Director
or
Committee Chairperson:
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Kevin L. Beicke, CFA, +1-212-908-0618
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Philippe Beard, +1-212-908-0242
Director
or
Committee Chairperson:
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com