Fitch: OCC Approval of OG&E’s Scrubbers Provides Some Clarity

Fitch Ratings does not expect the recent Oklahoma Corporation Commission (OCC) decision approving Oklahoma Gas and Electric Company's (OG&E, rated 'A'/Stable Outlook) environmental compliance plan for its Sooner coal-fired generation facility to impact the utility's credit ratings.

On April 28, 2016, the OCC approved OG&E's request to install dry scrubbers at Sooner coal unit 1 and 2, primarily to comply with EPA rules, promote fuel diversity, and protect customers from natural gas price volatility. The approval clarified the company's strategy to comply with mainly the regional haze standard and meet the deadline in 2019. Recovery of costs associated with the project will be addressed by the OCC in a future proceeding.

OG&E and its parent, OGE Energy's (OGE, rated 'A-'/Stable Outlook) ratings and Outlook reflect Fitch's expectation that in either a scrubber installation or gas conversion scenario at Sooner, credit metrics at OGE and OG&E will remain consistent with the companies' current rating categories. Under the scrubber scenario, Fitch estimated that OGE and OG&E's credit metrics would be elevated in 2016 and 2017 relative to the gas conversion scenario before rebounding in 2018, assuming reasonable recovery after project completion.

Going forward, OGE and OGE's rating stability will depend on on-time and on-budget execution of the scrubber project and other environmental compliance projects, as well as reasonable and timely recovery in rates after completion of these projects.

Fitch continues to view the overall regulatory compact in Oklahoma as supportive from a credit perspective, although it is modestly concerned with the lack of predictability of the OCC and the lengthy review process of the initial ECP. Future challenges of this approval from opposing parties are also a source of concern.

In 2015, OG&E produced 49% of energy from coal fired generating plants, 44% from gas plants and 7% from wind. On Dec. 2, 2015, the OCC denied OG&E's ECP and its request to pre-approve the Mustang Modernization Plan. On Dec. 23, 2015, the OCC denied OG&E's motion requesting modification of the OCC's order for the purpose of approving only the ECP. In February 2016, OG&E filed an application with the OCC requesting approval on or before May 2, 2016 to install dry scrubbers at Sooner unit 1 and 2. Subsequently, OGE indicated that it planned to convert the facility to gas if OCC doesn't issue an order by May 2 and suspended related construction work.

For more details regarding OGE and OG&E's ratings and Outlook, please refer to Fitch's press release on April 15th titled "Fitch Affirms OGE and Oklahoma Gas & Electric; Outlook Stable".

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

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