Fitch Rates Southwestern Public Service Co.'s Add-On FMBs 'A-'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings rates Southwestern Public Service Company's (SPS) $200 million add-on issuance of 3.30% first mortgage bonds (FMBs), Series No. 3 due June 15, 2024 'A-'. The FMBs rank pari passu with SPS' existing secured debt.

The Rating Outlook is Stable.

Net proceeds will be used for the repayment of short-term debt and other general corporate purposes.

KEY RATING DRIVERS

Challenging Regulatory Environment

SPS operates in Texas and New Mexico, under the jurisdiction of the Public Utility Commission of Texas (PUCT) and the New Mexico Public Regulation Commission (NMPRC). Fitch considers these regulatory regimes to be challenging from a bondholder perspective, primarily due to a low authorized return on equity (ROE) and other factors in the rate-setting process that make it difficult for utilities to earn their authorized ROEs.

Despite the challenging regulatory environment, SPS has done relatively well in recent rate cases, with balanced outcomes in Texas and New Mexico. Supportive rate design mechanisms in both states include fuel and purchased power recovery mechanisms and riders for energy efficiency program costs. SPS also has riders for distribution costs and transmission infrastructure improvement in Texas and for renewable energy program costs in New Mexico.

Pending Texas 2015 Electric Rate Case

In June 2015, SPS revised its retail electric, non-fuel rate case filing in Texas, seeking an overall increase in annual revenue of $42.1 million. As part of the request, SPS is seeking a waiver to allow for inclusion of $392 million in additional capital investment for the second half of 2014. A PUCT decision is expected later this year, with rates retroactively effective June 11, 2015. A balanced decision is important to maintain SPS' credit quality, given that 72% of SPS' retail electric operating revenues are derived from Texas.

Elevated Capex

SPS has a relatively large capital spending program. Fitch expects capex to total $570 million in 2015, roughly stable since 2013, after having increased significantly from an annual average of $330 million in 2010-2012. Capex is expected to peak at an annual average of $725 million over 2016-2017, and then decline to an average of $585 million per year over 2018-2019. The bulk of capex is for transmission investments in New Mexico.

Modest Weakening in Credit Metrics

For the LTM ended June 30, 2015, FFO fixed-charge coverage stood at 6.1x, FFO-adjusted leverage at 3.0x, and adjusted debt/EBITDAR at 3.8x. Over 2015-2018, Fitch forecasts FFO fixed-charge coverage to average 4.7x, FFO-adjusted leverage 4.0x, and adjusted debt/EBITDAR 3.9x. These forecasted metrics are weaker than the recent actual metrics but adequate for the existing ratings.

Parent Support

Fitch views the relationship between SPS and its parent, Xcel Energy Inc. (Xcel; 'BBB+'/Outlook Stable), as a credit positive for the utility. Xcel provides equity funding to SPS to support its long-term growth and optimize its capital mix within a 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 SPS include:

--Electricity sales growth averaging 4% per year over the next four years;

--O&M expense growing at 2.5% per year over the next four years;

--Rate case outcomes consistent with historical rate orders.

RATING SENSITIVITIES

Positive: Given SPS' large capex program, a positive rating action is unlikely, but could occur if regulatory lag were to improve materially and if FFO-adjusted leverage and adjusted debt/EBITDAR both were to remain less than 3.5x on a sustained basis.

Negative: Future developments that may lead to a negative rating action include unfavorable regulatory developments that impede SPS from earning a timely return on its investments; adjusted debt/EBITDAR deteriorating to greater than 4.5x on a sustained basis; and a shift in management strategy that results in weaker financial support from Xcel.

LIQUIDITY

Fitch considers SPS' liquidity to be adequate. SPS primarily meets its short-term obligations through the issuance of commercial paper (CP) under its $400 million revolving credit facility, which expires in October 2019. At June 30, 2015, SPS had $209 million of CP issued and $36 million of letters of credit drawn, leaving $155 million of availability under this five-year unsecured facility.

Liquidity is also available through participation in a money pool with SPS' sister utilities Northern States Power Company-Minnesota ('A-'/Outlook Stable) and Public Service Company of Colorado ('A-'/Outlook Stable). SPS has a borrowing limit of $100 million, which was fully available at June 30, 2015.

Long-term debt maturities are manageable. SPS has $200 million of 5.60% senior unsecured notes due in October 2016 and $250 million of 8.75% secured senior notes due in December 2018. Fitch expects all SPS' upcoming debt maturities to be refinanced, likely with new issuances of FMBs.

Date of Relevant Rating Committee: April 21, 2015

Additional information is available on www.fitchratings.com

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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150910006246/en/

Fitch Ratings
Primary Analyst
Kevin L. Beicke, CFA
Director
+1-212-908-0618
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Philippe Beard
Director
+1-212-908-0242
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]
Sandro Scenga, New York, +1 212-908-0278
Email: [email protected]

Source: Fitch Ratings

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