Fitch: Supreme Court Decision Won't Affect OG&E's Ratings

NEW YORK--()--Fitch Ratings sees no rating impact following the U.S. Supreme Court's (Supreme Court) decision on May 27 to deny the petition by Oklahoma Gas and Electric (OG&E) to review a circuit court decision on regional haze. The long-term Issuer Default Ratings (IDR) for OG&E and its corporate parent OGE Energy Corp. (OGE) are 'A' and 'A-', respectively.

The Supreme Court's decision marks the end of the legal battle between OG&E and the Environmental Protection Agency (EPA) since December 2011 over whether the EPA acted lawfully in rejecting portions of state of Oklahoma's plan and issuing its own plan to address regional haze. The decision provides clarity on the timing and path that the company could take to implement the Federal Implementation Plan (FIP) imposed by the EPA. OG&E will have approximately 55 months to comply with the FIP. Fitch estimates that all related spending will complete by the first half of 2019.

OG&E and OGE's ratings have incorporated Fitch's expectations that OG&E will be allowed to recover costs, subject to prudency reviews, associated with state and federal environmental mandates. Fitch has included approximately $1.2 billion of environmental capex in its rating case, a majority of which is related to FIP. Spending is expected to peak from 2016 to 2018.

To comply with the SO2 emission standards in the FIP, OG&E could either install dry scrubbers or switch fuel at the four affected coal-fired units located at the Sooner and Muskogee generating stations. OG&E estimates that installing scrubbers at all four units could cost more than $1 billion. Though fuel switching is a much cheaper option, it will likely impair generation efficiency and reduce energy output.

Detailed implementation plans and recovery mechanisms are unknown until OG&E submits its Integrated Resource Plan (IRP) in June and files an environmental compliance plan later this year. If construction work in progress (CWIP) recovery is not pursued or disallowed, OG&E's funds from operations (FFO) adjusted leverage is expected to increase from the low 3x to high 3x during the construction period and return to be well positioned for the rating category once OG&E receives recovery in rates for the investment post construction.

Although Fitch believes that the required capital costs are manageable and will be recovered in rates, the impact of potential rate shock to customers and subsequently the political pushback for future recoveries are difficult to predict at this stage and could pressure OGE and OG&E's ratings.

As a background, on May 27, 2014, the U.S. Supreme Court denied OG&E's request to review a 10th Circuit Court of Appeals decision on Regional Haze. On July 19, 2013, the U.S. Court of Appeals for the 10th Circuit ruled that the EPA lawfully exercised its authority to reject Oklahoma's state plan and impose a federally mandated plan. OG&E and the Oklahoma Attorney General filed a joint appeal to the U.S. Supreme Court on January 29, 2014. The mandate from the 10th Circuit had been stayed until the Supreme Court's decision on the appeal.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28,, 2014);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 13, 2013);

--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2013);

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

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Recovery Ratings and Notching Criteria for Utilities

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

Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

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Contacts

Fitch Ratings
Primary Analyst
Julie Jiang
Director
+1-212-908-0708
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Glen Grabelsky
Managing Director
+1-212-908-0577
or
Media Relations
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Julie Jiang
Director
+1-212-908-0708
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Glen Grabelsky
Managing Director
+1-212-908-0577
or
Media Relations
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com