Sept 5 - Fitch Ratings has assigned an 'A' rating to Public Service Company of Colorado's (PSCo) $800 million issuance of first mortgage bonds (FMBs) consisting of $300 million 2.25% series no. 23 due Sept. 15, 2022 and $500 million 3.60% series no.24 due Sept. 15, 2042. Proceeds will be used to repay short-term borrowings, to fund the repayment or redemption of outstanding long-term debt including the maturity of $600 million of 7.875% first mortgage bonds due Oct. 1, 2012, and for general corporate purposes including the funding of utility capital expenditures and the repayment of commercial paper. The notes will rank on parity in right of payment with all existing and future secured debt. The Rating Outlook for PSCo is Stable. Stable Outlook: The rating of PSCo is supported by the low-risk nature of its regulated utility operations, which deliver consistent cash flow metrics due in large part to balanced regulatory treatment. Financial metrics are improving relative to Fitch guidelines for the rating and risk profile, with rating forecasts for EBITDA-to-interest and funds from operations (FFO) interest coverage in the range of 6.0x and 5.5x through 2014. Fitch's projections are predicated on the continuation of regulatory mechanisms designed to facilitate full and timely cost recovery during this capital intensive period. Balanced Regulatory Treatment: A rate settlement (electric) was issued in Colorado in May 2012. The utility received a multi-year base rate increase, with $73 million effective May 1, 2012, $16 million effective Jan. 1, 2013, and $25 million effective Jan. 1, 2014. The settlement was silent to test year period; PSCo can file either historical or forecast test years. Fitch considers the multi-year settlement, plus the inclusion of regulatory features to facilitate timely cost recovery of fuel and certain non-fuel costs, as supportive of a stable credit profile. The authorized return on equity (ROE) level included in the rate settlement dropped to 10.0% from 10.5%. The lower authorized ROE reflects a national trend and is consistent with market cost of capital returns in a sustained period of low interest rates. The rate of 10.0% is slightly lower than what Fitch considers the current sector median. PSCo is subject to an earnings sharing band whereby earnings above 10.0% are to be split 60% with ratepayers, earnings above 10.2% are split 50% with ratepayers, and earnings above 10.5% are given to ratepayers. PSCo earned a 10.23% ROE in 2010. [Management may be able to share the 2011 actual ROE.] Sizeable Capital Investment Plan: PSCo plans to invest $4.3 billion through 2016. Primary spending drivers are environmental, transmission, and distribution projects. Fitch expects capital funding to be a balance of cash on hand, equity infusions from parent company Xcel Energy, Inc. (Issuer Default Rating 'BBB+', Stable Outlook by Fitch), and debt capital market financings. Sufficient Liquidity and Moderate Debt Re-financings: Fitch considers PSCo to have a liquidity position sufficient relative to utility funding needs, with $692 million in borrowing capacity available and $5.23 million cash on hand at June 30, 2012. The utility amended pricing terms and extended the maturity date on its existing four-year $700 million bank credit facility in July 2012. The facility size can be increased by up to $100 million and the facility expiration date is extended from March 2015 to July 2017, with an option to extend the expiration for two respective 12-month periods. This recent development largely mitigates concern related to sufficient bank credit availability, and no single bank has extended greater than 8% of the $700 million borrowing capacity. PSCo debt maturities are manageable with $250 million due in 2013, $275 million due in 2014, and $0 due in each of 2015 and 2016. There are no further debt maturities due in 2012 following the refinancing of the $600 million 7.875% FMBs discussed above. Fitch expects financing activity over the next few years to be driven by capital investment funding needs. Negative Rating Action Trigger: An adverse regulatory order that negatively affects the financial position of the utility. Positive Rating Action Trigger: Execution of a sizeable multi-year capital investment plan and timely recovery of investment costs limit positive rating action at this time. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --Corporate Rating Methodology, Aug. 8, 2012; --Recovery Ratings and Notching Criteria for Utilities, May 3, 2012; --Parent and Subsidiary Rating Linkage, Aug. 8, 2012; --Rating North American Utilities, Power, Gas and Water Companies, May 16, 2011. Applicable Criteria and Related Research: Parent and Subsidiary Rating Linkage Recovery Ratings and Notching Criteria for Utilities Corporate Rating Methodology Rating North American Utilities, Power, Gas, and Water Companies
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