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Global Credit Research - 06 Oct 2010
New York, October 06, 2010 -- Moody's Investors Service has affirmed all ratings of OGE Energy Corp.
(OGE, senior unsecured rating at Baa1/ P-2 short-term),
including its operating subsidiaries, mid-stream pipeline
operator, Enogex, LLC (Enogex, senior unsecured rating
at Baa3), and regulated electric utility, Oklahoma Gas and
Electric Company (OG&E, senior unsecured rating at A2 / P-1
short-term). The rating outlook is stable.
Today's rating action was prompted by OGE's announcement that
it was selling a 9.9% stake in Enogex to ArcLight Capital
Partners for about $183 million in cash. Because those proceeds
will go to OGE, this joint venture has no immediate credit impact
on Enogex. This joint venture with a seasoned investor in the energy
sector addresses OGE's past challenges in financing Enogex's
burgeoning growth opportunities in a credit-supportive manner.
On the negative side, this joint venture vehicle could subject Enogex
to increased event risk, including mergers and acquisitions or step-out
investments outside its legacy operations, either of which could
foment execution risk and a higher business risk profile over time.
Following the transaction, OGE's ratings, and our approach
in evaluating OGE's credit profile, will continue to be based
on the combined credit risk of its two core operating subsidiaries,
OG&E and Enogex. We expect that OGE will retain a significant
equity interest in the new enterprise for at least the next several years.
As such, on a consolidated basis, OGE will continue to derive
a material amount of cash flow from non-regulated operations.
While we acknowledge certain benefits in the contemplated structure,
including the flexibility of OGE to determine the level of future capital
contributions, OGE remains a holding company with no operations
of its own, relying solely on the up-streaming of cash from
its subsidiaries to service its debt and pay dividends to shareholders.
Historically (2007-2009), there has been an approximate 65%/35%
split of consolidated operating income contribution between the utility
We expect little to no impact on the credit profile of OG&E resulting
from this transaction. The utility continues to exhibit relatively
stable and predictable cash flows resulting in credit metrics historically
in line with the rating category. In affirming the rating we incorporate
a view that OG&E will remain conservatively capitalized and will continue
to be afforded supportive regulatory treatment in Oklahoma. There
is an elevated capital spending plan at the utility over the next several
years with an emphasis on new transmission and wind generation which is
expected to weaken its credit metrics somewhat. We believe future
upstream distributions from Enogex will be an important source of capital
during this time.
OGE Energy Corp.: senior unsecured Baa1; commercial
Oklahoma Gas & Electric Company: senior unsecured A2; commercial
Enogex LLC: senior unsecured Baa3
The outlook for all three entities is stable.
Given the anticipated capital structure and the current level of credit
metrics there is limited prospects for the ratings at OGE, OG&E,
or Enogex to be upgraded in the near-term.
Longer-term, we would likely have a more positive rating
view at Enogex, if debt/EBITDA could be sustained below 1 times
and if this was achieved while increasing the level of operational and
geographical diversification in its business lines. Alternatively,
Enogex's rating could go down if its ratios weaken for a sustained
period, including debt/EBITDA exceeding the mid to upper 3 times
range and if its business mix becomes materially riskier, for example,
if its G&P gross margins sustain an increase from roughly 60%
of total contribution currently to above 70%.
The utility's rating is not likely to be upgraded at this time;
however, should OG&E successfully execute on its elevated capital
plan and achieve credit metrics such as funds from operations (FFO) to
debt in the high 20% range on a sustainable basis then a change
in outlook or rating could be considered. The inability to maintain
credit metrics including FFO to debt in the low-to-mid 20%
range for an extended period could place downward pressure on the outlook
or the rating. Additionally, an increase in the business
risk profile of the parent, requiring greater levels of dividend
support from OG&E, would be considered negative to OG&E's
Given that the preponderance of consolidated assets and earnings of OGE
will continue to be derived from the utility, OGE's rating
will continue to be heavily influenced by its electric operations.
To the extent that OGE's interest in Enogex drops below 50%
and is viewed more as an equity investment there could be a positive impact
on the current Baa1 rating of OGE. However, this assumes
the modest amount of debt at the parent is unchanged and the utility's
current credit profile is maintained or strengthened. Alternatively,
should the utility's profile weaken, negatively impacting
the profile of OGE, there could be downward pressure on the ratings
of OG&E, OGE and Enogex, given the still substantial holding
of non-regulated operations at Enogex.
Headquartered in Oklahoma City, Oklahoma, OGE Energy Corp.
is an electric utility holding company that operates through its two principal
subsidiaries, Oklahoma Gas and Electric Company and Enogex LLC.
For the trailing-twelve month period ended June 30, 2010,
OGE reported consolidated revenue of $4.1 billion and balance
sheet debt of $2.0 billion.
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Affirms Ratings of OGE Energy, Enogex and OG&E; Outlook Stable
250 Greenwich Street
New York, NY 10007
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