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05 Feb 2003
MOODY'S DOWNGRADES DEBT RATINGS OF OGE ENERGY CORP. TO Baa1 (Sr. Unsec.), ENOGEX, INC. TO Baa3 (Sr. Unsec.), AND OKLAHOMA GAS & ELECTRIC CO. TO A2 (Sr. Unsec.)
Approximately $2 Billion of Debt Securities Affected
New York, February 05, 2003 -- Moody's Investors Service downgraded the debt ratings of OGE Energy
Corp. (OGE Energy, the parent company) to Baa1 senior unsecured
from A3, its energy supply subsidiary Enogex, Inc.
to Baa3 senior unsecured from Baa2, and its utility subsidiary Oklahoma
Gas & Electric Company (OG&E) to A2 senior unsecured from A1.
The rating outlook is stable for the parent company and for OG&E.
The rating outlook for Enogex is negative.
These rating actions reflect: 1) the weak financial performance
at Enogex, particularly in its gas gathering and processing (G&P)
segment; 2) the negative effects of OG&E's rate cut and
regulatory risks related to a rate filing expected later this year;
and 3) a diminished credit profile for OGE Energy, consistent with
the downgrades of its subsidiaries.
The stable rating outlooks for OGE Energy and the utility reflect the
assumption that OGE Energy will implement its business plan as expected,
including issuance of equity as a significant portion of any substantial
Enogex's negative rating outlook reflects the execution risk in
accruing the benefits from the initiatives it took last year to reduce
its business and financial risks. Further rating action may be
taken if the company is unsuccessful in improving its returns and demonstrating
decreased volatility in its earnings.
OGE Energy Corp.
OG&E anchors the credit quality of the consolidated entity,
accounting for roughly 60% of consolidated assets, 40%
of the debt, and 70% of funds flow from operations.
Enogex accounts for much of the balance, with 40% of consolidated
assets and 30% of debt and funds flow from operations. The
30% balance of consolidated debt is attributable to the parent
company: $200 million of trust preferreds and the short-term
debt it incurs on behalf of its subsidiaries under its commercial paper
Having no operating assets of its own, the parent relies on its
primary subsidiaries OG&E and Enogex to meet its cash requirements.
Thus, the parent's ratings are downgraded along with those
of its subsidiaries. Cash flows from OG&E support OGE Energy's
high common dividend (payout exceeded net income in both 2001 and 2002).
Enogex has been upstreaming about $10 million annually on an after-tax
basis, which meets most of the interest expense on the trust preferreds.
OGE Energy's consolidated debt plus trust preferreds-to-capital
was about 63% at year-end 2002. Moody's believes
that the company's leverage is high, considering the commodity
price risk and the ongoing challenge to sustain a turnaround at Enogex.
Enogex's financial performance have been depressed by recurrent
losses in its G&P segment. Since 1999, return-on-assets
have fallen to very low levels. EBIT and pre-tax earnings
(before impairment charges) coverage has been less than 1.0 for
the last two years. Should poor returns continue, additional
impairment charges may be possible.
Enogex should be able to accommodate its maintenance capex with its internally
generated cash. Although it may have free cash flow to incrementally
reduce debt, its debt (about $600 million, including
leases) will likely remain high for some time, especially given
its business risk profile. Moody's notes that the company
has reduced its exposure to keep-whole contracts that caused it
to process gas at a loss in the past few years. In addition,
it instituted a price risk management program and began hedging its exposures
in the processing business. Moody's will monitor the efficacy
of these measures in improving Enogex's profitability.
Oklahoma Gas & Electric Company
In the near-term, Moody's expects OG&E's
earnings and cash flow to decline as a result of its rate cut.
The utility will also be subject to the execution and regulatory risks
involved in its plan to acquire and finance a major new generation plant,
as well as in it being granted sufficient and timely recovery for the
OG&E has yet to announce a definitive purchase agreement for a power
plant. The rate order, meanwhile, gives the company
an incentive to acquire the new plant by end of this year. The
company plans to finance slightly more than half of the acquisition cost
(which could be in the range of $160 million) with common equity
to maintain a capitalization stipulated by the Oklahoma Corporation Commission
There is regulatory risk in the rate filing that is stipulated in adding
the new plant to OG&E's rate base. Although the OCC has
ordered and encouraged the acquisition of the plant, the company's
profitability and cash flow may be impaired if the recovery is not sufficient
The following rating actions were taken:
OGE Energy Corp. - senior unsecured from A3 to Baa1,
subordinated from Baa1 to Baa2;
Enogex Inc. - senior unsecured from Baa2 to Baa3;
Transok - senior unsecured from Baa2 to Baa3, issuer rating
from Baa2 to Baa3;
OGE Energy Capital Trust I - trust preferred from Baa1 to Baa2;
Oklahoma Gas & Electric Company -- senior unsecured from A1 to
A2, issuer rating from A1 to A2, senior unsecured shelf from
(P)A1 to (P)A2.
OGE Energy Corp., with headquarters in Oklahoma City,
is the parent company of Oklahoma Gas and Electric Company (OG&E),
the state's largest electric company, and Enogex Inc.,
the tenth largest gas pipeline company in the U.S. in terms
of miles of pipe.
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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