Fitch Rates Southwestern Public Service Co.'s $150MM FMBs 'A-'; Outlook
NEW YORK -- June 2, 2014
Fitch Ratings has assigned an 'A-' rating to Southwestern Public Service Co.'s
(SPS) new 3.30% $150 million issuance of first mortgage bonds due June 15,
2024. The Rating Outlook is Stable.
The new notes will rank pari passu with SPS' existing senior secured
obligations. Net proceeds will be used to repay short-term debt borrowings and
for general corporate purposes, including the funding of SPS' capital
KEY RATING DRIVERS
Low Risk Business Model: SPS' 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 given it
represents approximately 73% of total operating revenues. Rate design
mechanisms include fuel and purchased power recovery mechanisms that limit
commodity risk in both jurisdictions. SPS also has riders for transmission and
distribution costs in Texas. 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.
Pending Texas Rate Proceeding: SPS is requesting a $48.1 million electric rate
increase based on a 10.4% ROE, a common equity ratio of 53.89%, and a June
2013 test year. The addition to rate base of capital investments for the
period July 1, 2012 through June 30, 2013, and an increase in depreciation
expense of approximately $16 million are the main drivers of the rate request.
A rate decision is expected in Q3 2014. Fitch's Base Case projections assume a
balanced rate outcome that is supportive of SPS' current financial profile and
is consistent with SPS' most recent Texas rate order, when the utility
received more than 55% of its original rate request.
Balanced New Mexico Rate Order: On March 26, 2014, 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 rate increase included a $12.7 million base
revenue and the recovery of approximately $18.1 million of renewable energy
costs via a rider. 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' 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.
Adequate Credit Metrics: Fitch expects SPS' credit metrics to remain in line
with the 'BBB' rating category over the forecast period. For the LTM ending
March 31, 2014, the ratios of FFO fixed charge coverage and FFO adjusted
leverage were 4.9x and 4.4x, respectively. Fitch forecasts FFO fixed charge
coverage and FFO adjusted leverage to remain near current levels over the next
few years. Balanced outcomes in regulatory proceedings and effective cost
control management will be critical to maintaining current ratings.
Elevated Capex: SPS plans on spending a sizeable $3.21 billion over the next
five years. Capital spending is earmarked primarily for transmission
investments in the Texas Panhandle and eastern New Mexico. Fitch expects the
utility to fund capex requirements with a balanced mix of internally generated
funds, long-term debt, and equity infusions from SPS' parent holding company,
Xcel Energy Inc. (XEL).
Sufficient Liquidity: SPS has access to $300 million of total available
capacity under a five-year bank credit facility that expires July 2017. As of
March 31, 2014, there was $212 million of available liquidity, including $210
million of unused facilities and $2 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 outstanding
at March 31, 2014. Fitch considers long-term debt maturities to be manageable
with $200 million due in 2016 and $250 million due in 2018.
Positive Rating Actions: No positive rating actions are anticipated in the
Negative Rating Actions: Unfavorable regulatory developments including the
inability to timely recover costs associated with SPS' large capex program
would likely lead to a negative rating action.
FFO adjusted leverage greater than 4.6x on a sustained basis could lead to
negative rating actions.
A shift in management strategy that results in weaker financial support from
XEL would pressure the ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Research Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage' (May 28, 2014);
--'Rating U.S. Utilities, Power and Gas Companies' (March 11, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
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Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Brian Bertsch, +1-212-908-0549
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