EUR 850.00 For Business Accounts Only

Morningstar | Oklahoma Regulation Remains Concern for OGE Energy

OGE Energy faces more uncertainty than a typical regulated utility. A below-average regulatory framework in Oklahoma and a significant investment in a midstream business in a very competitive market drive our no-moat rating, despite our view that OGE's regulated utility for the most part is well run and its service territory is in a strong economic region.In December 2015, the Oklahoma Corporation Commission denied wholly owned Oklahoma Gas & Electric's request for preapproval of the $1 billion Environmental Compliance Plan. That hotly debated decision took 16 months and signaled to us that regulatory relationships in Oklahoma had deteriorated.In March 2017, OG&E was again on the receiving end of a disappointing OCC decision that will require customer refunds after being granted a fraction of the increase the utility had requested. Management has expressed optimism that regulation will improve, in part because of Oklahoma legislation that formed a select committee to evaluate the OCC's structure, mission, staffing, and budget. The committee is expected to report its results before 2018 year-end, but any implementation will be subject to political debate and take time. The OGE management team has had regulatory successes in Arkansas, but that state represents less than 10% of the company's total rate base.In 2013, OGE Energy formed Enable Midstream Partners with two other firms, contributing all of its interstate pipelines and field services business. OGE Energy owns about 26% of the master limited partnership units and 50% of the general partnership. The partnership has recently had several commercial successes for new business, and drilling activity has strengthened in the regions served by Enable. Thus, our outlook has improved for the partnership, which represents over 25% of our fair value estimate for OGE.Most regulated utilities did not benefit from the 2017 Tax Cuts and Jobs Act, since the benefits of lower tax rates flow to customers. However, because of OGE’s material earnings stream from Enable, which is unregulated and taxed at the OGE level, the company will benefit from tax reform.