Fitch Ratings has assigned an 'A+' rating to Northern States Power Company-Wisconsin (NSP-Wisconsin) issuance of $400 first mortgage bonds (FMBs).

The FMBs rank pari passu with NSP-Wisconsin's other senior secured obligations. Net proceeds from the FMB issuance will be used to replay a $200 million bond maturity in June 2024, to pay-down short-term debt and for general corporate purposes.

NSP-Wisconsin's Long-Term Issuer Default Rating (IDR) is 'A-' with a Stable Rating Outlook.

Key Rating Drivers

Constructive Regulatory Environment: NSP-Wisconsin operates within a constructive regulatory environment overseen by the Public Service Commission of Wisconsin (PSCW). Supportive regulatory measures include an above average authorized ROE, a forward-looking test year, a purchased gas adjustment clause, and annual filings for fuel and purchased energy adjustments.

Rate Case Outcome: In November 2023, the PSCW approved an ROE of 9.8% and an equity ratio of 52.5%, as well as a rate increase of approximately $1 million for the electric utility, which was modestly lower than Fitch's expectations. The PSCW also approved a $5 million rate increase for the natural gas utility. The new rates were implemented on Jan. 1, 2024. NSP-Wisconsin previously operated under a settled multiyear plan through 2023, based on a 9.80% ROE for 2022, a 10.00% ROE for 2023 and a 52.5% equity ratio for both years.

Large Capex Plan: Fitch's main rating concern is the relatively large capex plan over the forecast. NSP-Wisconsin plans to spend $3.0 billion over 2024-2028, compared with $1.5 billion of capex spent over 2019-2023). A large amount of that capex will be on electric transmission projects, which receive timely recovery of capital costs that helps mitigate high capex concerns. Total projected rate base growth is 12% CAGR over the forecast, which is above the industry average.

Adequate Financial Metrics: Fitch expects NSP-Wisconsin's financial metrics to remain supportive of existing ratings, despite a large capital investment plan over the forecast. Fitch forecasts FFO leverage to average 3.8x-4.0x through 2028.

Parent-Subsidiary Linkage: There is parent-subsidiary linkage with Xcel Energy Inc. (BBB+/Negative). The linkage follows a weak parent/strong subsidiary approach for Northern States Power Company-Minnesota (NSP-Minnesota; A-/Stable), Public Service Company of Colorado (PSCo; A-/Stable) and NSP-Wisconsin. Fitch considers NSP-Minnesota, PSCo and NSP-Wisconsin stronger than Xcel due to the utilities' low-risk operations and exposure to constructive regulatory jurisdictions. For the stronger subsidiaries, Fitch considers the legal ring-fencing factor porous due to the general protections afforded by economic regulation, including a restriction on dividend payments.

Fitch also evaluates the access and control factor as porous. Xcel centrally manages the treasury function for its utilities and is the sole source of equity. However, each subsidiary issues its own long-term debt. Fitch would allow the utilities' Long-Term IDRs to be up to two notches higher than Xcel's Long-Term IDR.

Derivation Summary

The credit profiles of NSP-Minnesota and NSP-Wisconsin are similar and well positioned at an 'A-' Long-Term IDR. The credit profile of PSCo is modestly weaker positioned vs. its sister utilities. PSCo, NSP-Minnesota and NSP-Wisconsin all operate within relatively constructive regulatory environments with reasonably good rates of return. However, PSCo's earned returns lagged allowed due to historical test year filings. PSCo's business risk is higher, as it operates in a state with elevated wildfire risk exposure and faces potential wildfire liabilities, unlike its sister utilities.

All three entities have large capex plans, but timely cost recovery in their respective regulatory jurisdictions mitigates high capex issues. PSCo and NSP-Minnesota benefit from larger scale and scope of operations than NSP-Wisconsin.

The three entities' financial metrics are well positioned within their rating category, but Fitch expects PSCo's leverage to remain modestly higher than the other two utilities due to the large capex program and assumed $2 billion of wildfire liability. Fitch forecasts FFO leverage in the 4.0x-4.5x range through 2028 for PSCo, 3.8x-4.0x for NSPWisconsin and 3.4x-3.8x for NSP-Minnesota.

Key Assumptions

Total base capex of $3.0 billion over 2024-2028;

Rate case outcomes consistent with historical rate orders;

Tax credit transferability included in the financing plan;

Normal weather.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

A positive rating action is unlikely in the near term due to the large capex plan;

FFO leverage expected to remain less than 3.5x on a sustained basis.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

FFO leverage expected to exceed 4.5x on a sustained basis;

A material deterioration of the regulatory environment that meaningfully reduces the stability and

predictability of earnings and cash flow;

A shift in management strategy that results in weaker financial support from Xcel.

Liquidity and Debt Structure

Adequate Liquidity: Fitch considers liquidity for Xcel and its utility subsidiaries adequate. They all primarily meet short-term liquidity needs through the issuance of CP under each of their RCFs, all of which expire in September 2027. RCF borrowing limits for each entity are $1.5 billion for Xcel, $700 million for PSCo, $700 million for NSP-Minnesota, $500 million for Southwestern Public Service Company and $150 million for NSP-Wisconsin. Xcel and its utility subsidiaries had an aggregate $3.4 billion of availability under their RCFs as of April 22, 2024.

Liquidity is also available to PSCo, NSP-Minnesota and SPS through participation in an intercompany money pool. Borrowing limits are set at $250 million for PSCo and NSP-Minnesota, $150 million for NSP-Wisconsin and $100 million for SPS. Xcel and its utility subsidiaries require modest cash on hand. Xcel had $1.1 billion of unrestricted cash and cash equivalents at April 22, 2024. Xcel and its subsidiaries have manageable long-term debt maturity schedules over the next five years.

Issuer Profile

NSP-Wisconsin is a regulated integrated electric and natural gas utility that serves approximately 0.3 million electric customers and 0.1 million natural gas customers in Wisconsin and Michigan. NSP-Wisconsin is a wholly-owned subsidiary of Xcel Energy Inc.

Date of Relevant Committee

06 February 2024

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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