Financial Markets - Investor Desk

Business Strategy & Outlook

OGE Energy completed its long transition to a fully regulated utility in 2021 when it divested its midstream energy business through a swap transaction with Energy Transfer. Typical utilities investors should be more comfortable with OGE now that it has no direct exposure to energy commodity markets. OGE’s elimination of its midstream energy exposure along with improving regulation at its core Oklahoma operations puts it on track to produce more stable, growing earnings in 2022 and beyond than it has in many years. OGE management has said it plans on selling the 95 million limited partner units of Energy Transfer worth some $950 million acquired as part of the deal for OGE’s Enable. OGE had formed Enable with two other firms in 2013, contributing all its interstate pipelines and field services business. The OGE will realize after-tax proceeds exceeding $500 million that it can use to fund its planned growth investments at the electric utility.

Improving rate regulation in Oklahoma is a key part of OGE’s growth plan. In 2020, subsidiary Oklahoma Gas & Electric proposed an $810 million grid modernization plan that includes a rate tracker cost recovery mechanism. A settlement established a partial rate tracker with the remainder of the investments recovered in a general rate case. The modified framework reduces regulatory lag and will improve cash flow available for dividends and growth. In 2019, the Oklahoma Corporation Commission approved a settlement for environmental upgrades at the Sooner coal-fired plant and natural gas conversions of coal units at the Muskogee coal plant. OG&E had been seeking approval for these investments for a decade. Exiting the midstream business will reduce earnings and will increase the payout ratio on OGE’s common dividend to over 85% by as per estimates. Even though the earnings grow 6% annually, the dividend likely will grow around 2% during the next four years until OGE’s payout ratio reaches the mid-70% range.

Financial Strengths

Between 2022 and 2025, the OGE will invest nearly $4 billion in its utility. The company should be able to finance these investments with cash flow from utility operations, proceeds from the sale of its Energy Transfer units, and roughly $600 million of additional debt. One cannot foresee any material equity issuances in the next five years. The company has maintained a conservative capital structure, and one doesn’t expect a sizable shift in that strategy once it exits its Energy Transfer position and issues securitized debt to cover its excess fuel costs related to Winter Storm Uri in February 2021. The OGE’s dividend growth slowed after losing the earnings and cash distributions from Enable following the Energy Transfer transaction. Cash distributions from Enable helped OGE average 10% annual dividend growth since forming Enable in 2013. However, a large drop in energy prices and the economic impact of COVID-19 led Enable to cut its distribution by 50% in 2020. Less cash flow from Enable required OGE’s board to slow dividend increases to 6.2% in 2019, 3.9% in 2020, and 2% in 2021. Without the Enable earnings expected OGE’s payout ratio will climb above 80% for several years. The dividend increases will average 2% annually for the next few years until the payout ratio falls to within management’s 65%-70% target.

Bulls Say

OGE is making progress improving Oklahoma regulation so that it can execute its growth investment plan without creating a drag on its return on equity.

Although the expected dividend increases too slow to about 2% annually, investors still should benefit from growing earnings and minimal equity needs.

The economy in OG&E’s service territory is healthy and annual customer growth is again exceeding 2%, higher than most electric utilities.

Company Description

OGE Energy is a holding company for Oklahoma Gas & Electric, a regulated utility offering electricity generation, transmission, and distribution to more than 800,000 customers in Oklahoma and western Arkansas. In December 2021, OGE closed a merger between Enable Midstream Partners and Energy Transfer. This resulted in OGE acquiring 95.4 million limited partner units of Energy Transfer in return for its 25.5% limited partner interest in Enable, a midstream services company it created in 2013.

(Source: Morningstar)

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