Fitch Rates OG&E's Senior Notes 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to Oklahoma Gas and Electric Company's (OG&E) proposed $250 million issue of senior notes due March 15, 2044. The Rating Outlook is Stable.

KEY RATING DRIVERS

Constructive Regulatory Framework

OG&E's ratings and Outlook benefit from the supportive regulations by the Oklahoma Corporation Commission (OCC), the Arkansas Public Service Commission (APSC) and the Federal Energy Regulatory Commission (FERC). In its primary service territory Oklahoma, OG&E is able to receive pre-approval of construction projects and has fuel adjustment clause and various riders and trackers that support storm cost recovery, pension expenses and smart grid investments. These mechanisms provide greater visibility of earnings and offset the lowered allowed return on equity of 10.2% in the rate case settlement in 2012.

Stringent Environmental Mandate

In 2013, OG&E's fuel mix comprised of 53% coal, 40% gas and 7% wind. OG&E's coal fleet is subject to numerous environmental mandates. OG&E is allowed to recover costs associated with state and federal environmental mandates. OG&E faces uncertainty due to the pending resolution of the regional haze dispute with EPA with regards to the approach and costs. In January 2014, OG&E filed petition with the US Supreme Court to review EPA's mandate to install scrubbers on four coal fired generation units or convert to gas units in order to comply with the regional haze rule.

If the Supreme Court denies the review, OG&E will have 55 months to implement EPA's Federal Implementation Plan (FIP). Fitch has included $1.2 billion environmental capex in its projections for this purpose. Oklahoma legislation allows recovery of necessary environmental capex in rates. However, the amount and timing of such recovery are uncertain. If OG&E's final plan requires a substantially greater investment or OG&E experiences extended lag in recovering such costs, its ratings and Outlook could be pressured.

Resilient Local Economy

Oklahoma is the primary service territory for OG&E. Oklahoma's unemployment rate was 5.2% in January, lower than national average of 6.6%. Oklahoma City's unemployment rate was 4.8% in December. From 2008 to 2013, OG&E has experienced stable customer growth of 0.9% per year.

RATING SENSITIVITIES

Positive

--Due to the uncertainty of the final resolution of regional haze dispute and recovery approach, it is unlikely that OG&E will be upgraded in the foreseeable future.

Negative

--If the final environmental compliance cost exceeds what Fitch has incorporated in the ratings substantially;

--If political backlash occurs and causes substantial disallowance or significant time lag in recovering environmental mandates through customer tariffs;

--If FFO adjusted leverage exceeds 4.5x during the environmental build out or exceeds 4.0x after the build out.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);

--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);

--'Rating U.S. Power and Gas Utilities' (March 11, 2014).

Applicable Criteria and Related Research:

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085

Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824215

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Contacts

Fitch Ratings
Primary Analyst
Julie Jiang, +1-212-908-0708
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Glen Grabelsky, +1-212-908-0977
Managing Director
or
Committee Chairperson
Shalini Mahajan, +1-212-908-0581
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Julie Jiang, +1-212-908-0708
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Glen Grabelsky, +1-212-908-0977
Managing Director
or
Committee Chairperson
Shalini Mahajan, +1-212-908-0581
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com