peterschreiber.media/iStock via Getty Images OGE Energy Corp. ( OGE ) is a regulated electric utility that serves customers in Oklahoma and Arkansas. These are admittedly not the first states that most people would think of when considering an investment in a utility due to their largely rural nature, but in fact, there is a great deal to like about the overall demographics here that benefits this company in a very large way. OGE Energy also shares many of the characteristics that endear them to more conservative investors, most notably their general stability and relatively slow but consistent growth. The company’s most recent results certainly bear out this thesis, which I discussed in a previous article on the company. The utility sector, in general, tends to have somewhat higher yields than most other things in the market, which OGE’s 4.22% yield also bears out. Unfortunately, the company appears to be somewhat overvalued relative to its peers but there may still be some reasons to consider it. About OGE Energy
As stated in the introduction, OGE Energy Corp. is a regulated electric utility that serves customers throughout the state of Oklahoma, although it also has a relatively small operation in Arkansas: OGE Energy Fact Sheet Admittedly, this service area is almost entirely rural except for Oklahoma City, and rural areas are not exactly known for producing strong customer growth. This is unfortunate because customer growth is one of the only ways by which a utility can generate growth. Fortunately, though, Oklahoma City is much more favorable in this regard. The city had one of the lowest unemployment rates in the nation at 1.6% compared to 3.8% for the nation as a whole. This has resulted in population growth for the region since people have begun to migrate to it in search of work. The city also has a fairly reasonable cost of living compared to some other areas, which also could be attractive to migrants. We certainly do see this as OGE’s customer base increased by 1.4% over the past year: OGE Energy Investor Presentation This trend is expected to continue going forward. It should be obvious how this would result in growth for OGE Energy. After all, the more people live in an area, the more people are drawing power from the grid and, of course, paying their electric bills and thus providing the company with revenues. In fact, though, the consumption of electricity tends to increase more rapidly than the population in general. This is because a growing population of people tends to spur business creation, particularly if those people are skilled or have disposable income. As a business, in general, uses more electricity, the draw on the grid increases more rapidly than the population. We can see this quite easily in the fact that OGE Energy saw the consumption of electricity increase by 2.4% over the course of 2021. The company expects to see demand increase by 3% to 5% this year as fears of the coronavirus subside and people return to their pre-pandemic lives. Naturally, increased consumption of electricity benefits OGE Energy for the same reason that a rising population does since the company bills based on the amount of electricity consumed.
A 3% to 5% growth rate is unlikely to greatly attract investor dollars, however. Fortunately, OGE Energy has other ways to grow its earnings. The most important of these is to increase its rate base. The rate base is the value of the company’s assets upon which it is able to earn a specified rate of return. As this specified rate of return is a percentage, any increase in the value of the company’s rate base allows it to increase the prices that it can charge its customers in order to earn that specified rate of return. The usual way that a company increases the value of its rate base is by investing money into constructing, upgrading, modernizing, and potentially expanding its infrastructure. OGE Energy, like most utilities, is constantly doing this. OGE Energy has a particularly necessary reason to do this as the firm needs to support the growing demands of its customer base. Over the 2022 to 2026 period, OGE Energy plans to invest $4.75 billion into its utility infrastructure. This will grow the company’s rate base from $7.554 billion to $10.369 billion during the period: OGE Energy Investor Presentation There may be some readers that notice that this projected rate base growth is less than the amount of money that the company is […]
source OGE Energy: Strong Renewable Credentials And A 4.22% Yield
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