Dive Brief:
- Moody's Investors Service last week affirmed the ratings of OGE Energy Corp. and key subsidiary Oklahoma Gas & Electric Co. (OGE), but warned the rating outlooks for both companies have been changed to negative from stable.
- Analysts cited the the potential for a decline in financial metrics "amidst some uncertainty over cost recovery and earned returns in Oklahoma."
- Moody's decision comes after Fitch Ratings maintained stable outlooks, but also noted it was closely watching the utility's rate proceeding related to its installation a pair of coal scrubbers at its 1,140 MW Sooner plant.
Dive Insight:
Ratings agencies are wary of OGE's financial outlook, with Fitch and Moody's indicating concern over the regulatory environment and outlook for cost recovery.
In a June 22 research note, Fitch said the Oklahoma Corporation Commission's regulation "is overall supportive but showing signs of deterioration."
According to The Oklahoman, part of the issue is the growing length of rate cases, uncertainty over cost recovery of coal plant retrofits and recent revenue increases far short of utility requests.
For instance, a $92 million rate request OGE filed in late 2015 was approved just this March — at less than $9 million.
While Moody's maintained ratings on the companies' bonds, Vice President and Senior Analyst Ryan Wobbrock said the negative outlook "reflects the potential for a decline in financial metrics amidst some uncertainty over cost recovery and earned returns in Oklahoma."
He added that the utility's cash flow to debt could persist at around 25%, "which is weak for the company's current A1 rating. And any deterioration of the utility's financial metrics would impact parent OGE's metrics, "since the utility makes up over 80% of OGE's consolidated cash flow," Wobbrock said.
Moody's also noted that expected financial pressure is due to that March rate order reducing certain depreciation recovery levels and OGE's allowed return on equity.
"This will result in lower cash flow levels than previously anticipated, as OGE seeks recovery for over $1 billion in capex over the next two years," the ratings agency said.
OGE spokesman Brian Alford told The Oklahoman that the utility's bonds are positive and noted that S&P has yet to weigh in.
"What we're seeing is two of the ratings agencies have made comments and raised their concerns," Alford said. "Of course, should they take further action that would downgrade our credit rating, that would increase the cost of borrowing and fall ultimately on our customers."
Correction: The headline of this post has been updated to reflect that Moody's has issued a negative outlook for OGE Energy but has not downgraded the company's bonds.
