Business Strategy & Outlook
The fair value estimate for OGE Energy is $37 after Oklahoma regulators recently approved a $30 million annualized rate increase, in line with a settlement reached in June. One can reaffirm no-moat and stable moat trend ratings. One had assumed Oklahoma regulators would approve a rate increase in line with the settlement, supporting 6% average annual earnings-growth rate during the next four years. This is in line with management’s 5%-7% long-term earnings growth target. The $30 million increase is below OGE’s $163.5 million request primarily because regulators approved OGE’s current 9.5% allowed return on equity instead of OGE’s 10.2% request. The 9.5% allowed ROE is slightly below other utilities’ allowed ROE, but one can think it’s a positive that regulators did not cut it. One has incorporated the first-half earnings boost that OGE received from warmer-than-normal weather. The warm weather to boost third-quarter earnings also, likely resulting in 2022 EPS at the high end of management’s $1.87-$1.97 guidance range.
The large weather reversal after a cooler-than-normal 2021 summer could lead to a more than 10% jump in earnings this year. However, normal weather in 2023 could lead to mostly flat earnings year over year. On a weather-normalized basis, one can assume earnings growth will depend on OGE’s execution of its $3.8 billion capital investment plan for 2022-25 and continued electricity demand growth. The OGE has benefited from the recent rally in Energy Transfer’s limited partner units from $10 per unit in early July to $12 now. The OGE sells by the end of the year all of the 22.1 million units it held in late July. OGE’s deal to swap its Enable ownership stake for Energy Transfer units is turning out to be a win for OGE shareholders. Energy Transfer units are up about 40% since OGE closed the transaction in December 2021, resulting in about $300 million of pre tax proceeds, or about $1 per share after tax, above the initial deal value.
Financial Strengths
Between 2022 and 2025, as per forecast, OGE will invest nearly $4 billion at 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 based on its quick exit from Energy Transfer units and ability to issue 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 the 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 earned return on equity.
- Although the 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 exceeds 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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