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Rating Action:

Moody's downgrades Oklahoma Gas & Electric to A3 and affirms OGE Energy at Baa1; outlooks stable

31 May 2019

Approximately $3.0 billion of debt securities downgraded

New York, May 31, 2019 -- Moody's Investors Service ("Moody's") today downgraded the ratings of Oklahoma Gas & Electric Company (OG&E) including its senior unsecured and Issuer ratings to A3 from A2, commercial paper rating to P-2 from P-1 and short-term revenue bond rating to VMIG 2 from VMIG 1. At the same time, Moody's affirmed the ratings of OGE Energy Corp. (Baa1 senior unsecured and P-2 commercial paper). The outlooks for both companies are stable. See a full list of affected debt toward the end of the press release.

RATINGS RATIONALE

"We expect OG&E's financial metrics to remain significantly below historical levels due to higher debt levels and lagging cash flow from tax reform" said Ryan Wobbrock, Vice President -- Senior Credit Officer, "With cash flow to debt ratios now in the low-20% range, OG&E's financial profile is more comparable to A3 integrated utility peers" added Wobbrock.

OG&E's financial ratios have declined in recent years due to debt-financed capital spending on environmental compliance projects, most recently for scrubber installation and the conversion of some coal-fired power generation units to natural gas-fueled. This has helped to reduce greenhouse gas emissions and facilitate some transition away from coal-fired generation. However, it has also increased OG&E's debt at the same time that cash flow has been lagging due to tax reform and a series of Oklahoma rate cases that have not filled the resulting gap in cash flow.

These developments, combined with financial provisions outlined in May 2019 rate case settlement filings, will keep OG&E's ratio of cash flow from operations before changes in working capital (CFO pre-WC) to debt between 20-23% over the next several years. This range is more appropriate for an A3 rated vertically integrated utility with average regulatory support. By way of comparison, the average LTM 1Q19 CFO pre-WC to debt figure for other A3 integrated peers is 21%.

Parent company OGE's financial profile, on the other hand, will continue to remain robust and supportive of its Baa1 rating, with little-to-no parent leverage and stable cash flow contribution from its master limited partnership (MLP) interest in Enable Midstream Partners, LP (Enable, Baa3 stable). Over the next 2-3 years, we expect OGE's ratio of CFO pre-WC to debt to be around 20% from an adjusted GAAP perspective, over 18% when proportionately consolidating Enable's CFO and debt (based on OGE's 25.5% limited partner interest) and approximately 17% when excluding all of Enable's $140 million of annual distributions to OGE.

These financial metrics are strong for a Baa1 utility holding company and help to offset OGE's exposure to Enable, a higher-risk midstream business. While roughly 88% of Enable's margin comes from fee-based or contracted sources, with an additional 8% of margin hedged, we still view the business as commodity-exposed since its customer base is mostly oil and gas producers and around 60% of its gross margin is derived from gas gathering and processing operations. The other 40% of Enable's gross margin comes from natural gas transportation and storage assets that carry a lower business risk and have more exposure to affiliate utility customers, but have short average contract tenors of 2-3 years.

Therefore, the resulting one-notch differential between the ratings of OGE and its utility subsidiary, OG&E, primarily reflects structural subordination between the two legal entities and only secondarily the higher risks associated with the 20% of cash flow contribution from its MLP.

OGE has no long-term debt outstanding, which is relatively unique in the sector that has parent long-term debt levels often above 25% of consolidated debt. However, OGE is increasingly relying on short-term debt as part of its financing strategy, which we view to be a permanent layer of capital. At year-end 2018, the percentage of OGE's short-term debt to total consolidated debt was about 4%, but increased to 11% by 31 March 2019 due mostly to the use of holding company commercial paper to redeem a $250 million debt maturity of OG&E in January 2019.

The stable outlook for both companies reflects a reduced capital plan, fewer rate case filings and therefore a more predictable financial profile in the coming years. It also incorporates OG&E's continued transition away from coal-fired generation and a declining carbon emission profile. The company remains highly exposed to carbon transition risks, with about 45% of its owned energy production coming from coal-fired facilities and about 93% from fossil-fueled sources. However, since 2005, OG&E's sulfur dioxide emissions are almost 90% lower, nitrogen oxide emissions have been cut by about 75% and carbon dioxide (CO2) is down by roughly 40%. Furthermore, the company is targeting to reduce CO2 levels an additional 10% by 2030.

Factors that could lead to an upgrade

For OGE, an upgrade would require an upgrade of OG&E and higher financial metrics for the holding company. For example, OGE's CFO pre-WC to debt increasing to over 25%, without any additional business or financial risk (e.g. parent level debt) could increase the rating.

OG&E could be upgraded if CFO pre-WC to debt increases above 24% on a sustainable basis and regulatory provisions for cost recovery and earned returns improve.

Factors that could lead to a downgrade

OGE could be downgraded if financial policies change and more leverage is used at the holding company, if Enable's distributions decline or if business risk increases. The company could also be downgraded if OG&E is downgraded or if consolidated adjusted GAAP CFO pre-WC to debt were to fall below 20% on a consistent basis.

For OG&E, CFO pre-WC to debt sustained below 19% could lead to a downgrade. Also, increased regulatory contentiousness or a decline in the level of OCC support could lead to a downgrade.

OGE Energy Corp. is a publicly traded holding company, headquartered in Oklahoma City, OK. OGE is a domestic energy delivery company that includes electric generation, transmission and distribution as well as energy services operations. OGE owns Oklahoma Gas & Electric Company and a 25.5% limited partner interest in portion of Enable Midstream Partners, LP.

Downgrades:

..Issuer: Garfield (County of) OK, Industrial Authority

....Senior Unsecured Revenue Bonds, Downgraded to A3 from A2

....Senior Unsecured Revenue Bonds, Downgraded to VMIG 2 from VMIG 1

..Issuer: Muskogee (Cnty of) OK, Industrial Trust

....Senior Unsecured Revenue Bonds, Downgraded to A3 from A2

....Senior Unsecured Revenue Bonds, Downgraded to VMIG 2 from VMIG 1

..Issuer: Oklahoma Gas & Electric Company

.... Issuer Rating, Downgraded to A3 from A2

....Senior Unsecured Bank Credit Facility, Downgraded to A3 from A2

....Senior Unsecured Commercial Paper, Downgraded to P-2 from P-1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2

....Senior Unsecured Shelf, Downgraded to (P)A3 from (P)A2

Outlook Actions:

..Issuer: OGE Energy Corp.

....Outlook, Changed To Stable From Negative

..Issuer: Oklahoma Gas & Electric Company

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: OGE Energy Corp.

.... Commercial Paper, Affirmed P-2

....Senior Unsecured Bank Credit Facility, Affirmed Baa1

....Senior Unsecured Shelf, Affirmed (P)Baa1

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ryan Wobbrock
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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