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-'.
In addition, Fitch has affirmed OGE's and OG&E's Short-Term IDRs at 'F2'. The Rating Outlook for both entities is Stable.
OGE's ratings and Outlook are supported primarily by its regulated utility OG&E. OG&E derives over 90% of its operating revenue in Oklahoma and over 80% of its rate base is in Oklahoma. Fitch views the regulatory relationship in Oklahoma as generally constructive. The last rate case has been settled. Winter Storm Uri-related securitization was executed in 2022 and proceeds were received. OGE's ratings and Outlook consider the sale of the midstream investment.
In 3Q22, OGE sold its entire investments in Energy Transfer, L.P. (ET) and became a fully regulated utility holding company. OGE's 2022 FFO leverage is elevated primarily due to the large cash taxes for the sale of ET investments. Going forward, Fitch expects OGE's and OG&E's FFO leverage to be consistent with their respective rating levels.
Key Rating Drivers
Securitization Proceeds Received: In February 2021, Winter Storm Uri resulted in record peak demand for electricity and extremely high natural gas and purchased power prices in OG&E's service territory. On Dec. 15, 2021, OCC issued a financing order that authorized Oklahoma Finance Development Authority (OFDA) to issue up to $760 million in securitization bonds maturing in 28 years. The approved actual fuel cost was $739 million, which is about 99% of the $749 million fuel cost incurred by OG&E in Oklahoma. In July 2022, OG&E received approximately $750 million from the issuance. The securitization debt was issued by the OFDA and is not recorded on OG&E's financial statements.
In January 2023, the APSC issued an order authorizing OG&E to amortize the $91 million regulatory assets related to Winter Storm Uri over 10 years using a pre-tax weighted average cost of capital of 6.49% as a carrying charge beginning March 2021. In February 2023, APSC initiated prudency reviews over the costs related to Winter Storm Uri.
Exit Midstream Business: OGE's ratings and Outlook reflect the improved credit profile as a pure-play regulated utility holding company after the exit of the midstream business in 2022. In 3Q22, the company sold all of its ET investments. The total sale proceeds were approximately $1 billion. OGE's effective tax rate on the gain is approximately 45% and cash taxes approximated $276 million. OGE used the after-tax proceeds to pay down debt, reducing the need for future debt issuance at the parent. The midstream segment represented approximately 15% of OGE's total EBITDA in 2021.
Oklahoma Rate Case Approved: The last rate case was settled. In Sept. 8, 2022, the OCC approved a settlement between OG&E and key intervenors. OG&E has been authorized a base rate revenue increase of $30.0 million. There is no change to the current return on equity of 9.5% and OG&E's requested capital structure based on a common equity percentage of 53.37%.
OG&E's Grid Enhancement Plan projects recorded as of March 31, 2022 are considered prudent and are included in the base rates. OG&E's Grid Enhancement Plan interim recovery would be limited to projects placed in service in 2022, 2023 and 2024, capped at a revenue requirement of $6.0 million for each annual investment plan and include communication, automation and technology systems projects, as well as certain weather hardening projects. The rider mechanism will terminate once projects included in the 2024 annual investment plan are completed or no later than July 1, 2025. As OG&E has implemented an interim $30 million rate increase in July 2022, no refund was necessary.
High Capex: OG&E's capex has been elevated since 2022. OG&E's capex, excluding the generation transition capex, will average $950 million per year compared with approximately $700 million per year from 2019 to 2021. Over 70% of the capex over the next five years is related to transmission and distribution (T&D) investments due to customer growth and T&D resiliency projects. OG&E hasn't finalized capex needs on the generation capacity replacement at this time.
OG&E plans to retire approximately 850 MW to 1 GW of generation capacity through 2027 and replace them with solar or solar/battery hybrid and hydrogen capable combined cycle gas turbines. The plan is consistent with the Integrated Resource Plan filed with the OCC in 2021. Fitch notes that large capex could raise leverage ratios.
Solid Customer and Load Growth: In 2022, customer growth was 1.1%, continuing a similar level over the last 10 years. Total weather normalized retail load growth was 3.1% in 2022, driven by the commercial, oilfield and public authorities. Commercial sector load is 15% above 2019 levels. Data mining is a strong contributor to the commercial load. OG&E projects 4% to 5% load growth in 2023. Even assuming a flat data mining load, load growth would remain robust at 2.5% to 3.5%.
Overall Supportive Regulatory Framework: In 2022, approximately 88% of OG&E's electric revenue was subject to the jurisdiction of OCC. Positive aspects of Oklahoma regulation include interim rate increases after 180 days of filing, six-months post-test year, riders for storms, smart grid and demand programs, and high equity capitalization of over 50%. OG&E's 9.5% ROE is around industry average and the 53.37% equity ratio is above average. However asset depreciation rates are low.
In Arkansas and under FERC, OG&E has formulaic rating-making and forward test years. OG&E's authorized ROE and equity capitalization in Arkansas are 9.5% and 50%, which are average compared to industry peers. Arkansas also allows for an environmental compliance rider.
FERC allows capital work in progress recovery in the rate base. OG&E's FERC ROE, under a settlement agreement in May 2019, is 10.5%, including a 50bp adder for participating in the Southwest Power Pool, a regional transmission organization (RTO). Equity capitalization remains 56% for transmission, a credit positive. In November 2019, the settlement was approved. In April 2021, FERC proposed removing the 50 bps adder for transmitting utilities that have joined an RTO for longer than three years. FERC has taken no actions on this proposal.
Credit Metrics: In 2021, OGE and OG&E's credit metrics were affected by the extraordinary fuel costs due to Winter Storm Uri. OGE was also affected by the poor performance of its midstream investments. In 2022, OGE's FFO leverage was affected by the large tax payment from the sale of ET investments. Fitch estimates OGE's FFO leverage in the next three years will average in the low to mid-4x range. OG&E's FFO leverage is estimated to average around 4x. These credit metrics remain consistent with the respective IDRs.
Parent-Subsidiary Rating Linkage: There is parent subsidiary linkage between OGE and OG&E. Fitch determines OGE's standalone credit profile based upon consolidated metrics. Fitch believes OG&E has a stronger credit profile on a standalone basis. As such, Fitch has followed the stronger subsidiary path. As a regulated utility, legal ring fencing for OG&E is considered porous given the general protections afforded by regulatory capital structure and other restrictions.
Access and control are porous. OGE manages the treasury function for OG&E and is the sole source of equity; however, OG&E issues its own short-term and long-term debt. OGE does not guarantee the debt obligations at OG&E. Due to these considerations, Fitch generally limits the IDR notching difference to two.
Derivation Summary
OG&E is well positioned compared to peers. OG&E has reduced dependence on coal in recent years. In 2022, coal accounts for approximately 21% of OG&E's total generation capacity, compared with Alabama Power's (A/Negative) 45% and Public Service Company of Oklahoma's (PSO; BBB+/Stable) 7.9%. Oklahoma's regulatory environment has been recovering since 2018 with shorter rate case duration and the approval of environmental capex in the last two cases.
Alabama's utility commission has a long constructive and predictable track record for its utilities. OG&E's FFO leverage is expected to average 4x in the next three years. Alabama Power's projected FFO leverage is approximately 4.1x. PSO's FFO is expected to improve by 2023 to just at, or slightly better than 4.8x.
OGE is less diversified and smaller than PSO's parent company American Electric Power (AEP; BBB/Stable). However, OGE's business risk is partially offset by the consistent customer growth in Oklahoma and stronger credit metrics. OGE and CenterPoint Energy, Inc. (CNP; BBB/Stable) have both become almost fully regulated utility holding companies in 2022. CNP's transmission and distribution (T&D) utility and natural gas local distribution companies (LDC) are perceived as lower risk than OG&E's integrated utility business.
OGE's regulatory treatment has improved since 2018. CNP's gas utilities enjoy generally supportive regulations, but the T&D had an unfavorable rate case. CNP's acquisition of Vectren Corporation has also resulted in a weaker credit profile. OGE is projected to produce an average FFO leverage of low to mid-4x, compared with CNP and AEP's mid-5x.
Key Assumptions
Implement the general rate case terms approved in September 2022;
OG&E's capex averages $950 million per year for the next five years;
Normal weather.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
OGE
If FFO leverage is below 3.8x on a sustained basis, OGE could be upgraded;
OG&E
OG&E could be upgraded if FFO leverage sustains below 3.3x
Factors that could, individually or collectively, lead to negative rating action/downgrade:
OGE
If FFO leverage exceeds 4.8x on a sustained basis, OGE could be downgraded;
OG&E
If FFO leverage exceeds 4.3x on a sustained basis, negative rating action could occur;
If OG&E is not able to recover its capital investments on a timely manner or without material disallowance.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
OGE and OG&E have adequate liquidity. They each have an unsecured revolving credit facility of $550 million, both maturing on Dec. 17 2027. They use the revolver to back up CP borrowings and LCs. As of YE 2022, the two facilities had $1,150 million available in total.
In May 2022, OGE Energy entered into a $100 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 substantially the same covenants as OGE Energy's existing 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/cap ratio of 70%. OGE and subsidiaries are currently in compliance with their respective covenants. There is no ongoing 'material adverse change' clause. OG&E must obtain regulatory approval from FERC in order to borrow on a shortterm basis. OG&E is authorized to incur up to $1 billion in short-term borrowing s at any one time for the two-year period beginning Jan. 1, 2023 and ending Dec. 31, 2024.
The next debt maturity will occur in May 2023 ($500 million for each company), which is expected to be refinanced or repaid. After that, the next major maturity is in July 2027 when 6.65% $125 million OG&E notes will be due. OG&E and OGE typically don't hold a lot of cash on balance sheet and rely on the revolvers for immediate cash needs. As of YE 2022, cash balance was $88 million.
Issuer Profile
OGE Energy is a holding company doing business through OG&E, which generates, transmits, distributes and sells electric energy 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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
OGE ENERGY CORP. 
