Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of OGE Energy Corp. (OGE) at 'BBB+' and Oklahoma Gas & Electric Company (OG&E) at 'A-'.
Fitch has also affirmed OGE's and OG&E's Short-Term IDRs at 'F2'. The Rating Outlook for both entities is Stable.
OGE's ratings reflect the low business risk profile of its core regulated utility, OG&E, and generally balanced rate regulation in Oklahoma, despite a measure of uncertainty due to recent regulatory developments. Elevated capex at OG&E is expected to pressure headroom in credit metrics at OGE and OG&E over the forecast period, leaving little cushion to absorb untoward developments. Fitch estimates FFO leverage for OGE to average 4.8x during 2024-2026 and 4.1x for OG&E, levels consistent with the companies' current ratings.
Key Rating Drivers
Low Risk Utility Business: OGE's rating reflects its low business risk profile as a utility holding company of a regulated electric utility - OG&E. OG&E is a fully regulated, vertically-integrated electric utility operating in Oklahoma and Arkansas. OG&E's revenue represents 100% of OGE's consolidated revenue.
IRP-Driven Elevated Capex Plans: OG&E intends to invest $6 billion from 2024 to 2028, marking a significant 26% increase over its previous five-year plan. The capex spend includes transmission (16%), Oklahoma expansion and grid reliability (50%), generation related (19%) and others. Fitch notes that an upward revision in capex is possible from additional capacity requirements to service load growth and OG&E's plans to retire approximately 850MW to 1 gigawatt (GW) of generation capacity through 2027. While capex is sizeable, Fitch also believes it would be supported by the expected continuance of healthy customer and load growth in Oklahoma.
Reduced Headroom in Credit Metrics: OG&E's metrics are expected to remain higher than previously expected, albeit consistent with current ratings, with FFO leverage averaging 4.1x through 2026 pressured by elevated utility capex.
At the parent level, Fitch estimates that OGE will raise additional debt through 2026 to term out some short-term debt and support utility level capex. Currently, no additional equity support is expected beyond the ongoing Dividend Reinvestment Plans (DRIP). Fitch believes, the aforementioned will keep the FFO leverage higher than previously estimated averaging near its current negative threshold of 4.8x through 2026. Restrictive rate case outcomes and additional material debt at the parent leading to elevated leverage on a sustained basis could lead to negative rating actions.
Recent Developments in Oklahoma: In 2023, approximately 86% of OG&E's electric revenue was subject to the jurisdiction of the Oklahoma Corporation Commission (OCC). A recent peer rate case decision by the OCC has been somewhat restrictive from a credit perspective, in Fitch's view, with the commission imposing changes to a rate case settlement, lowering an already below average authorized ROE and capping residential rate increases. The decision injects a measure of uncertainty into the regulatory compact in Oklahoma in Fitch's view.
Base Rate Case Filed: OGE has filed a rate case with the OCC requesting a revenue increase of $332.5 million based on a requested ROE of 10.5% and an equity layer of 53.5%. The revenue request mainly includes recovery of capital investments, increased expenses including vegetation management and higher depreciation rates. Fitch expects a decision for OG&E in 3Q24. Fitch assumes a reasonable rate case decision but notes that a restrictive outcome could adversely impact OG&E's credit metrics.
Fitch also notes the continuing supportive regulatory constructs under the OCC include interim rate increases after 180 days of filing, six-months post-test year and riders for storms, smart grid and demand programs. OG&E's 9.5% ROE is slightly under the industry average, while the 53.37% equity ratio is above average.
FERC and Arkansas Overall Constructive: In Arkansas, OG&E operates under an FRP based on historical test years, per the latest settlement agreement with the commission. OG&E's next formula-based rate update in Arkansas, effective April 2024, will be its last authorized one after which the extension of the formulaic rates will depend on the filing of a generate rate case. OG&E's authorized ROE and equity capitalization in Arkansas are 9.5% and 50%, which are slightly below/around the national average. Arkansas also allows for an environmental compliance rider. Fitch expects OG&E to file its next general rate case by 2025 in Arkansas following which Fitch assumes continuation of the FRP mechanism.
Under the Federal Energy Regulatory Commission (FERC), OG&E's rate structure is based on forward-looking test years. FERC also allows recovery of capital work in progress in the rate base. OG&E's authorized ROE, under a settlement agreement in May 2019, is a favorable 10.5%, including a 50bps adder for participating in the Southwest Power Pool, a regional transmission organization. Equity capitalization also remains a favorable 56% for transmission. While lower transmission ROEs are possible under FERC's ongoing ROE review, Fitch believes the risk is manageable within OG&E's current credit profile.
Wildfire Risk in Oklahoma: More frequent and significantly larger, more destructive wildfires in recent years, especially in the Western U.S., expose utilities operating in the region to wildfire activity and higher overall business risk. Fitch believes the recent Smokehouse Creek Fire's proximity to OG&E's service territory, underscores wildfire risk in the region. There have been no catastrophic wildfires in OG&E's service territory in recent years resulting in claims against the company and OG&E is implementing measures to mitigate wildfire risk. Nonetheless, there can be no assurance that OG&E will not experience a major wildfire event in its service territory and related liabilities. The aforementioned risks are embedded in Fitch's current rating thresholds for OGE and OG&E.
Continued Robust Load Growth: OG&E continues to witness robust customer and load growth. Customer growth averaged 1.1% over 2021-2023, while weather-normalized load growth was 2.7% in 2023, 3.1% in 2022 and 2.4% in 2021. The aforementioned was driven by the commercial, oilfield and public authorities. Commercial sector load, which was 15% above 2019 levels in 2022, grew by a further 11% in 2023 owing to strong data mining demand. Fitch projects 3%-5% of weather-normal load growth in 2024 followed by over 1% annual growth through 2026.
Parent-Subsidiary Rating Linkage: There is parent-subsidiary rating linkage between OGE and OG&E. Fitch determines OGE's standalone credit profile (SCP) based upon consolidated metrics. Fitch considers OG&E's SCP to be stronger than OGE's and has adopted the strong subsidiary path under its Parent Subsidiary Rating Linkage Criteria. Emphasis is placed on OG&E's status as a regulated utility. Legal ring-fencing is considered porous, given the general protections afforded by economic regulation. Access and control are also evaluated as porous.
OGE centrally manages the treasury function for OG&E and is the sole source of equity; however, both entities issue their own debt. OGE also does not guarantee the debt obligations at OG&E. Due to the aforementioned linkage considerations, Fitch will limit the difference between the Long-Term IDRs of OGE and OG&E to two notches.
Derivation Summary
OGE Energy Corp.
OGE is less diversified and smaller than other utility parent holding companies, American Electric Power Company, Inc. (AEP; BBB/Stable) and CenterPoint Energy, Inc, (CNP; BBB/Stable). More than 95% of CNP's operating income is derived from regulated utilities while AEP generates 90%-95% of EBITDA from regulated operations. OGE benefits from being a pure utility holding company with consistent customer growth in Oklahoma and stronger credit metrics at its utility, albeit with a higher business risk given potential wildfire risk in the state.
CNP's gas utilities and transmission operations have generally supportive regulations similar to the overall balanced constructs for most of AEP's utilities and Oklahoma for OG&E. OGE's FFO leverage is projected to elevate, averaging near its negative threshold of 4.8x through 2026, but is still better than CNP's forecasted to be mid to high-5x over the next couple of years. Similar to OGE, Fitch also considers AEP is weakly positioned in its current rating category with limited-to-no headroom within its current 5.8x FFO leverage downgrade threshold.
Oklahoma Gas and Electric Company
OG&E is well positioned compared with other peer integrated utilities with coal exposure. OG&E reduced independence on coal in recent years. In 2023, coal accounted for approximately 16% of OG&E's total generation capacity which is lower than Alabama Power Company's (A/Stable) at 40% and Public Service Company of Colorado (PSCo; A-/Stable) at 27% but higher than Public Service Company of Oklahoma's (PSO; BBB+/Stable) at 8%. Alabama's utility commission has a long track record of being constructive and predictable for its utilities. While Oklahoma has been overall supportive for utilities like OG&E and PSO, in the past, recent developments have been restrictive on the margin and the environment is considered somewhat weaker than Alabama. Colorado is also mostly constructive for PSCo.
In addition, PSO and OG&E face potential wildfire risk in the state. This is similar to PSCo which operates in a state with elevated wildfire risk exposure. However, unlike OG&E that has not had any history of wildfire claims against it, PSCo is facing a number of lawsuits resulting from the December 2021 Marshall fire. Potential liabilities, if determined the fire was ignited by the utility's equipment and the utility is deemed responsible for such claims under applicable negligence standards, could be material.
OG&E's FFO leverage is expected to average 4.1x through 2026 which is comparable to PSCo's FFO leverage in the 4.0x-4.5x range through 2028. PSO's FFO leverage is expected to improve in 2024-2026 to just at or slightly better than its downgrade threshold of 4.8x, consistent with its weaker rating. On the other hand, Fitch expects Alabama Power's FFO leverage to average approximately 3.6x over 2023-2025, which is in line with 'A' rated utilities.
Key Assumptions
Capex of $3.5 billion through 2026 at OG&E;
Oklahoma rate case decision in 3Q24 and annual rate case filings thereafter;
Arkansas general rate case filed in 2025 with rates effective early 2026;
ROE of 9.3% and 50% equity thickness in AR and ROE of 9.5% and 53.37% equity thickness in OK:
Normal weather;
No equity issuance at OGE in the forecast period apart from ongoing DRIPs;
Load growth in line with management estimates.
RATING SENSITIVITIES
OGE Energy Corp.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
While not expected at this time, given the large capex program and business risk associated with potential wildfires, FFO leverage below 3.8x on a sustained basis, could result in a positive rating action.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
FFO leverage exceeding 4.8x on a sustained basis.
Oklahoma Gas and Electric Company
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
While not expected at this time, given the large capex program and business risk associated with potential wildfires, FFO leverage below 3.3x on a sustained basis could result in a positive rating action.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
FFO leverage exceeding 4.3x on a sustained basis;
Any unexpected material deterioration in the regulatory environment that limits the utility's ability to recover cost of capital investments in a timely manner without material disallowance.
Liquidity and Debt Structure
OGE and OG&E each have an unsecured revolving credit facility of $550 million, both maturing on Dec. 18, 2028. OGE and OG&E's facilities can be used to back up CP borrowings and LCs. As of December 2023, the two facilities had $600 million available in total.
In May 2022, OGE entered into a $100.0 million floating rate unsecured three-year credit agreement, of which
$50.0 million is considered a revolving loan and $50.0 million is considered a term loan in order to preserve general financial flexibility within the company. The credit agreement, under certain circumstances, may be increased to a maximum commitment limit of $135.0 million and contains mostly the same covenants as OGE's existing $550.0 million revolving credit agreement. The credit agreement is scheduled to terminate on May 24, 2025.
OGE and OG&E are required to maintain a maximum debt/capital ratio of 70% and 65% respectively. Fitch expects continued compliance with the aforementioned covenants. OG&E must obtain regulatory approval from FERC in order to borrow on a short-term basis. OG&E is authorized to incur up to $1 billion in short-term borrowings at any one time for the two-year period beginning Jan. 1, 2023 and ending Dec. 31, 2024.
Maturities of OGE Energy's long-term debt during the next five years consist of $50 million in 2025 only. Maturities of OG&E's long-term debt during the next five years consist of $79.4 million in 2025, $181.0 million in 2027 and $500.0 million in 2028. OG&E and OGE typically do not hold a lot of cash on the balance sheet and rely on the revolvers for immediate cash needs.
OG&E has an intercompany borrowing agreement with OGE Energy whereby OG&E has access to up to $450.0 million of OGE Energy's revolving credit amount. This agreement has a termination date of Dec. 18, 2028. At Dec. 31, 2023, there was $85.1 million in intercompany borrowings under this agreement.
Issuer Profile
OGE Energy Corp (OGE) is a parent holding company whose principal operating subsidiary is a regulated and integrated electric utility, Oklahoma Gas & Electric Company (OG&E), operating in Oklahoma and Western Arkansas.
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.
OGE ENERGY CORP. 
