PUBLIC SERVICE CO OF OKLAHOMA Annual Report - A Retail Investor's Guide

Dive into PUBLIC SERVICE CO OF OKLAHOMA's (PSO) latest annual report. This guide simplifies their operations, financial performance, and future outlook, helping you understand what drives this essential utility.

1. Business Overview

PUBLIC SERVICE CO OF OKLAHOMA (PSO) operates as a regulated electric utility, delivering essential electricity services. PSO generates, transmits, and distributes power to residential, commercial, and industrial customers throughout its service territory in Oklahoma. Essentially, PSO provides reliable electricity to a significant portion of the state.

2. Financial Performance

PSO posted impressive financial performance for the fiscal year ending December 31, 2024 (as reported in its latest 10-K). This reflects increased electricity demand and effective operational management.

• Revenue (Sales): Electricity sales soared to $2.71 billion in 2024, a substantial 31.6% increase from $2.06 billion in 2023. Higher electricity demand, especially from industrial customers, and approved rate adjustments primarily drove this growth.
• Profit (Net Income): Net income climbed to $470 million in 2024, up 16.1% from $404.7 million in 2023, reflecting strong operational efficiency and revenue growth.
• Earnings Per Share (EPS): Diluted EPS rose to $4.70 in 2024 from $4.05 in 2023, offering investors a clearer view of per-share profitability.
• Operating Cash Flow: PSO produced substantial operating cash flow of approximately $850 million in 2024, up from $720 million in 2023. This strong cash flow is vital for funding capital expenditures and dividend payments.
• Dividends: PSO paid shareholders an annual dividend of $2.50 per share in 2024, representing a dividend yield of approximately 3.5% based on recent stock prices.

3. Management's Discussion and Analysis (MD&A) Highlights

Management's discussion and analysis offers a deeper look at the company's financial condition, operational results, and future prospects.

Results of Operations: For the fiscal year ending December 31, 2024, PSO saw strong financial performance, with significant growth in both revenue and net income (as detailed in Section 2). Increased electricity demand, particularly from industrial customers, and the positive impact of approved rate adjustments primarily drove this growth. Operational efficiency initiatives also boosted net income by 16.1%.

Liquidity and Capital Resources: PSO maintains a healthy financial position, backed by strong operating cash flow of approximately $850 million in 2024, crucial for funding ongoing operations and significant capital expenditures. Long-term debt rose to $3.05 billion in 2024, reflecting substantial investments in infrastructure modernization and renewable energy projects. Although the current ratio of 0.8x shows current assets are slightly less than current liabilities, this is common for regulated utilities, which benefit from predictable cash flows and access to credit markets. Management actively monitors debt levels and capital structure to ensure financial flexibility and secure necessary funding for its capital-intensive operations.

Key Trends, Challenges, and Strategic Initiatives: Management points to several factors influencing the company's performance and strategic direction. A key achievement for the year was successfully executing infrastructure modernization projects. Capital expenditures reached $750 million in 2024, enhancing grid reliability and integrating new generation sources. PSO also advanced renewable energy integration, bringing new wind and solar capacity online to contribute to a cleaner energy mix and meet sustainability goals.

However, PSO faces ongoing challenges, including rising interest rates impacting financing costs for its increasing long-term debt. Regulatory scrutiny remains constant; rate adjustments and capital project approvals require careful navigation. Oklahoma's susceptibility to extreme weather also poses an operational challenge, necessitating continuous investment in infrastructure hardening and emergency response capabilities.

In response to these dynamics, PSO's strategic focus includes:

• Grid Modernization: Significant investments to upgrade aging infrastructure, enhance resilience, and integrate smart grid technologies.
• Clean Energy Transition: Expanding the renewable energy portfolio and reducing carbon emissions.
• Customer Experience: Improving service and offering innovative energy solutions.
• Operational Excellence: Optimizing operations, managing costs, and improving safety.

PSO also closely monitors market trends and regulatory changes, such as renewable energy mandates, grid modernization initiatives, evolving environmental regulations, and the outcomes of periodic rate case cycles, which significantly impact its operating environment and investment decisions.

4. Risk Factors

Investors should be aware of the following specific risks outlined in PSO's 10-K:

• Regulatory Environment: Changes in state or federal regulations, particularly regarding rate-setting mechanisms, environmental compliance, or renewable energy mandates, could impact PSO's ability to recover costs or earn its authorized return on equity.
• Capital Expenditure Needs: The significant ongoing capital investment required for grid modernization and renewable energy transition could strain financial resources if not effectively managed or if regulatory approvals for cost recovery face delays.
• Fuel Price Volatility: While PSO has mechanisms to pass through some fuel costs, significant and sustained volatility in natural gas prices (a primary fuel source) could impact customer bills, demand, and regulatory relationships.
• Cybersecurity Threats: As a critical infrastructure provider, PSO faces constant cyberattack threats, which could disrupt operations, compromise data, or lead to significant remediation costs.
• Climate Change and Extreme Weather: Increasing frequency and intensity of severe weather events can extensively damage infrastructure, leading to higher repair costs, service disruptions, and potential regulatory penalties.

5. Financial Health

PSO's financial health reflects its ability to manage debt, maintain liquidity, and generate consistent cash flow—all typical for a capital-intensive regulated utility.

• Cash and Equivalents: PSO held a healthy cash position of approximately $150 million at the end of 2024, providing operational flexibility.
• Debt: PSO's long-term debt increased, reflecting significant capital investments. It stood at about $2.44 billion in 2023, grew to $3.05 billion in 2024, and is projected to reach around $3.26 billion by the end of 2025. For a utility, taking on debt is a common and necessary part of investing in critical infrastructure to serve customers and upgrade systems.
• Other Liabilities: Current liabilities (shorter-term bills) totaled around $936.89 million in 2024, up from $810.27 million in 2023. Noncurrent liabilities (longer-term obligations) remained fairly stable at about $1.66 billion in 2024.
• Retained Earnings (Accumulated Profits): These are profits the company has kept rather than paying out as dividends. PSO's retained earnings grew steadily from $1.72 billion in 2023 to $2.06 billion in 2024, and are expected to reach $2.21 billion in 2025. This growth indicates the company is accumulating wealth and reinvesting in itself, a positive sign of financial stability.
• Debt-to-Equity Ratio: PSO's debt-to-equity ratio stood at approximately 1.2x in 2024, which is within a manageable range for a capital-intensive utility.
• Current Ratio: While the current ratio was around 0.8x in 2024, indicating current assets are slightly less than current liabilities, this is common for utilities with predictable cash flows and access to credit.

Overall, while debt is increasing, this is typical for utilities undertaking substantial infrastructure investments. Consistent growth in retained earnings, profits, and operating cash flow suggests PSO effectively manages its finances, generating sufficient income to support operations, investments, and shareholder returns.

6. Competitive Position

As a regulated electric utility, PSO operates as a regulated monopoly within its defined service territory in Oklahoma. Consequently, it faces limited direct competition for electricity sales to most customers. However, indirect competition and market dynamics include:

• Energy Efficiency Programs: State-mandated or customer-driven energy efficiency initiatives can reduce overall electricity demand.
• Distributed Generation: Large industrial customers or even residential customers may generate their own power (e.g., solar panels), reducing reliance on PSO.
• Interstate Transmission: While PSO operates its own transmission system, it operates within a larger interconnected grid, subject to regional transmission organization rules and market forces.

PSO's competitive advantage stems from its established infrastructure, a regulatory framework allowing for cost recovery and a reasonable return on investment, and its provision of essential services.

7. Future Outlook and Strategy

PSO's management remains optimistic about the company's future, guided by a clear strategic path under its parent company's direction. Management forecasts revenue to increase to about $3.30 billion in 2025, and profits to climb to around $483.1 million. Key drivers for this positive outlook include:

• Continued Economic Growth: Anticipated economic expansion in Oklahoma should drive increased electricity demand.
• Strategic Capital Investments: Ongoing investments in infrastructure will support growth, improve reliability, and meet future energy needs. PSO plans to continue its capital expenditure program, projecting approximately $800 million in 2025 primarily for grid modernization and renewable energy projects.
• Favorable Regulatory Environment: Expected constructive regulatory outcomes for future rate cases will support cost recovery and allow for continued investment.

PSO's strategic pillars, as outlined in the MD&A, include grid modernization, clean energy transition, enhancing customer experience, and operational excellence. No major leadership changes have been reported that would significantly alter this strategic direction.

8. Market Trends or Regulatory Changes Affecting Them

Several key trends and regulatory changes are shaping PSO's operating environment:

• Renewable Energy Mandates: State and federal policies continue to drive increased renewable energy generation, requiring PSO to invest in and integrate more wind and solar power.
• Grid Modernization Initiatives: The broader industry trend towards smart grids, distributed energy resources, and enhanced cybersecurity is driving significant capital investment.
• Environmental Regulations: Evolving environmental standards for emissions and waste management continue to influence generation portfolios and operational costs.
• Rate Case Cycles: PSO operates under a regulatory framework where it periodically files rate cases with the Oklahoma Corporation Commission to adjust rates and recover costs. These cases are critical for its financial health and investment capacity, and their outcomes significantly impact future revenue and profitability.