Fitch Ratings said in an April 15 report on Oklahoma Gas & Electric that if the utilty can’t get an approval from the Oklahoma Corporation Commission by May 2 to install scrubbers on the coal-fired Sooner units, then it would take steps to switch the units to natural gas.
Fitch affirmed the Long-Term Issuer Default Rating (IDR) of utility parent OGE Energy Corp. at ‘A-‘ and the Long-Term IDR of Oklahoma Gas & Electric (OG&E) at ‘A’. The Rating Outlook for both entities is Stable. Approximately $2.8 billion of debt is affected by these actions.
OGE and OG&E’s ratings and Stable Outlook incorporate Fitch’s expectations that either a gas conversion or a scrubber installation scenario at Sooner units 1 and 2. OG&E’s latest request for approval of scrubbers at Sooner is still pending before the Oklahoma Corporation Commission (OCC). If the scrubber project is not approved by May 2, OG&E will make plans to convert the Sooner units to gas, Fitch noted.
Conversion of the Sooner units to gas would largely mitigate the uncertainty associated with complying with a U.S. Environmental Protection Agency deadline. Additionally, gas conversion would require substantially less capital costs ($100 million to convert vs. $400 million incremental capital to install scrubbers). OG&E would likely make the conversions in the late 2018 and early 2019 time frame.
In the event that the OCC approves the scrubbers by May 2, Fitch said iy estimates that OGE and OG&E’s credit metrics would come under moderate pressure in 2016 and 2017 relative to the gas conversion before rebounding in 2018. In either scenario, Fitch believes credit ratios at OGE and OG&E will remain consistent with the companies’ current rating levels. Notwithstanding the prolonged process in the OCC reviewing and so far rejecting a utility Environmental Compliance Plan (ECP) that includes the scrubbers, Fitch continues to view the overall regulatory compact in Oklahoma as supportive from a credit perspective.
In 2015, OG&E produced 49% of energy from coal-fired generating plants, 44% from gas plants and 7% from wind. In February 2016, OG&E filed an application with the OCC requesting approval on or before May 2 to install dry scrubbers at Sooner unit 1 and 2. Subsequently, OGE indicated that it will make plans for gas conversion if OCC doesn’t issue an order by May 2. Meanwhile, OG&E has suspended related scrubber construction work. On Dec. 2, 2015, the OCC denied OG&E’s ECP and its request to pre-approve the Mustang power plant 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.
Fitch also expects the outcome of OG&E’s pending general rate case (GRC) to be reasonably supportive. On Dec. 18, 2015, OG&E filed a GRC with the OCC requesting a net rate increase of $92.5 million and a 10.25% return on equity (ROE) on 53% equity based on a June 30, 2015 test year. The rate case seeks to recover $1.6 billion of electric infrastructure investments and rate impact on the termination of certain wholesale contracts since the last GRC in 2012. The GRC includes recovery of Activated Carbon Injection projects and all but two low NOx projects that were in service in December 2015. The commission staff in March recommended a net increase of approximately $82 million based on a ROE of 9.25%. The OCC is expected to issue an order by June 2016.