Fitch Rates Northern States Power Company-Minnesota's FMBs 'A+'
OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to Northern States Power Company-Minnesota's (NSP-Minnesota) $350 million, 3.60% first mortgage bonds (FMBs) due May 15, 2046. The FMBs will rank pari passu with NSP-Minnesota's other secured debt.
The Rating Outlook on NSP-Minnesota's Long-Term Issuer Default Rating (IDR; 'A-') is Stable.
Net proceeds will be used to repay short-term debt borrowings and for other general corporate purposes.
KEY RATING DRIVERS
Balanced Regulation: NSP-Minnesota's ratings primarily 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 improvements, renewable generation, and electric transmission. A revenue decoupling pilot program that was implemented as part of the last rate order in Minnesota provides further cash flow stability by eliminating the impact of weather and energy efficiency programs.
Elevated Capex: NSP-Minnesota has been implementing a large capex program that includes significant investments in renewable generation. Capex peaked at $1.85 billion in 2015 and is projected to be lower over the five-year period 2016-2020, returning to near the pre-2015 recent historical average of approximately $1.25 billion per year. However, this projected level of capex does not include other potential investments that could result in more-elevated levels of capex in future years.
Robust Credit Metrics: Fitch expects NSP-Minnesota's credit metrics to remain supportive of credit quality, with FFO fixed-charge coverage to average 7.0x, FFO-adjusted leverage 3.4x, and adjusted debt/EBITDAR 3.5x over 2016-2018.
Standard Notching: There is a moderate-to-strong linkage between the IDRs of parent Xcel Energy Inc. (Xcel; 'BBB+'/Stable Outlook) and each of its subsidiaries. The linkages originate primarily from strategic drivers. Each subsidiary is important to Xcel, and the parent financially supports its subsidiaries when needed via equity infusions and funding the inter-company money pool. Fitch considers a one- to two-notch differential between the IDRs of Xcel and its subsidiaries to be appropriate.
Fitch's key assumptions within the rating case for NSP-Minnesota include:
--EBITDA growth averaging 4.5% per year over 2016-2019;
--Capex averaging $1.25 billion per year over 2016-2020;
--Rate case outcomes consistent with historical rate orders.
Positive Rating Action: A positive rating action could occur if adjusted debt/EBITDAR were expected to improve to 3.0x and FFO-adjusted leverage to 3.2x on a sustained basis.
Negative Rating Action: 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 expected to weaken to 4.0x on a sustained basis; and a shift in management strategy that results in weaker financial support from Xcel.
Fitch considers NSP-Minnesota's liquidity to be adequate. Xcel and its utility subsidiaries primarily meet their short-term liquidity needs through the issuance of commercial paper (CP) under an aggregate $2.75 billion revolving credit facility that expires in October 2019. NSP-Minnesota has a borrowing limit of $500 million under this facility. As of March 31, 2016, NSP-Minnesota had $73 million of CP issued and $18 million of letters of credit outstanding, leaving $409 million of availability under NSP-Minnesota's portion of the facility.
Liquidity is also available to NSP-Minnesota through participation in an intercompany money pool. As of March 31, 2016, NSP-Minnesota had $93 million of money pool borrowings outstanding, with a total borrowing limit of $250 million.
Fitch expects Xcel and its utility subsidiaries to maintain ready access to the capital markets to fund capex and refinance maturing long-term debt.
NSP-Minnesota has a manageable long-term debt maturity schedule over the next five years, with $500 million of 5.25% FMBs due March 2018 and $300 million of 2.2% FMBs due August 2020.