OGE Now One of the Few U.S. Pure Play Electric Utilities

Strategist

Travis Miller

OGE Energy completed its long transition to a fully regulated all-electric utility in mid-2022 when it finished selling the 95 million Energy Transfer partnership units it acquired in a swap transaction for its stake in Enable. Utilities investors should be more comfortable with OGE now that it has no direct exposure to energy commodity markets or fossil fuels.

OGE's elimination of its midstream energy exposure along with improving regulation at its core Oklahoma electric utility puts it on track to produce more stable, growing earnings and dividends than it has in many years.

OGE shareholders benefited from a 40% rise in Energy Transfer's unit price between the Enable transaction close and its final unit sales. Aftertax proceeds easily topped management's initial $500 million estimate and resulted in an incremental $1 per share of value. Management is using the proceeds to fund its $1 billion annual capital investment plan.

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 80% in 2023 based on our estimates. Even though we expect earnings to 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.

Business Strategy & Outlook

We do not think OGE has an economic moat. Even though it has a service territory monopoly and efficient scale advantages, we believe it will be difficult for OGE to maintain a positive spread between earned returns on capital and its cost of capital in the long run. This is due in large part to our concerns about utility rate regulation in Oklahoma. 

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 included the installation of scrubbers at the Sooner coal-fired power plant. That hotly debated decision took 16 months and signaled to us that regulatory relationships in Oklahoma remained strained.

In March 2017, OG&E was again on the receiving end of a disappointing OCC decision that required customer refunds after being granted a fraction of the increase the utility had requested. 

In September 2019, the OCC finally 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.

More recently OG&E reached what we consider constructive rate settlements in late 2020 and mid-2022 supporting its growth investments, including its multi-year Grid Enhancement Plan. We consider these developments signs that Oklahoma regulation is improving, albeit slowly. OG&E's 9.5% allowed return on equity remains below the industry average.

OGE's much smaller utility in Arkansas benefits from more constructive rate regulation, including formula-based ratemaking.

None

Economic Moat

OGE Energy

OGE Energy Corp. is a holding company with investments in energy and energy service providers, offering physical delivery and related services for electricity in Oklahoma and western Arkansas and natural gas, crude oil and NGLs across the U.S. OGE Energy conducts these activities through two business segments: Electric Utility and Natural Gas Midstream Operations. The Electric Utility segment operations are conducted through OG&E, which generates, transmits, distributes, and sells electric energy in Oklahoma and western Arkansas. OG&E’s rates are subject to regulation by the OCC, the APSC, and the FERC. OG&E was incorporated in 1902 under the laws of the Oklahoma Territory and is a wholly owned subsidiary of OGE Energy. OG&E is an electric utility with franchised service territory in Oklahoma, as well as Fort Smith, Arkansas, and the surrounding communities. OG&E sold its retail natural gas business in 1928 and is no longer engaged in the natural gas distribution business. The Natural Gas Midstream Operations segment represents OGE Energy's investment in Energy Transfer's equity securities. The investment in Energy Transfer's equity securities is held through wholly owned subsidiaries and ultimately OGE Holdings. OGE Energy intends to exit the midstream segment prudently. The company was founded in August 1995 and is headquartered in Oklahoma City, OK.

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OGE Energy offers a nearly 10-year high dividend yield of 4.8% and is expected to grow its earnings per share by 5-7% per year until 2027. The company has a $4.75 billion investment plan for the 5-year period 2022-2026, which is expected to improve its growth potential. Risks include the company's disappointing past performance and the possibility of persistently high inflation, but the Fed's efforts to restore inflation to healthy levels are likely to benefit OGE Energy.

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OKLAHOMA CITY , May 4, 2023 /PRNewswire/ -- OGE Energy Corp. (NYSE: OGE), the parent company of Oklahoma Gas and Electric Company ("OG&E"), today reported earnings of $0.19 per diluted share during the three months that ended March 31, 2023, compared to $1.39 per diluted share in the same period 2022. Earnings for the first quarter of 2022 included $1.15 per diluted share from natural gas midstream operations, which OGE Energy fully exited in 2022 through the sale of all Energy Transfer units.

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OKLAHOMA CITY , Feb. 23, 2023 /PRNewswire/ -- OGE Energy Corp. (NYSE: OGE), the parent company of Oklahoma Gas and Electric Company ("OG&E") today reported earnings of $3.32 per diluted share in 2022, compared to earnings of $3.68 per diluted share in 2021. OG&E, a regulated electric company, contributed earnings of $2.19 per diluted share in 2022, compared with earnings of $1.80 per diluted share in 2021.

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