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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Fitch RatingsPrimary AnalystPhilippe
BeardDirector+1-212-908-0242Fitch Ratings, Inc.33 Whitehall
StreetNew York, NY 10004orSecondary AnalystRoshan
BainsDirector+1-212-908-0211orCommittee ChairpersonMichael
WeaverManaging Director+1-312-368-3156orMedia RelationsAlyssa
Castelli, New York,
+1-212-908-0540alyssa.castelli@fitchratings.comorElizabeth Fogerty,
New York, +1-212-908-0526elizabeth.fogerty@fitchratings.com