Fitch Rates Southwestern Public Service Co.'s $150MM FMBs 'A-'; Outlook Stable

  Fitch Rates Southwestern Public Service Co.'s $150MM FMBs 'A-'; Outlook   Stable  Business Wire  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 expenditure program.  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.  RATING SENSITIVITIES  Positive Rating Actions: No positive rating actions are anticipated in the near term.  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 ''.  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 Subsidiary Linkage  Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)  Additional Disclosure  Solicitation Status  ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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Contact:  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 Shalini Mahajan Senior Director +1-212-908-0351 or Media Relations Brian Bertsch, +1-212-908-0549  
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