Morningstar | CMS Energy's Investments in Michigan Drive Core Growth
CMS has improved its financial and strategic position dramatically during the past decade by working with Michigan regulators and politicians to turn the state into a constructive place for utility investment.The state's regulatory and political support gives CMS a transparent runway of earnings growth in its natural gas and electric businesses. CMS' integrated resource plan, or IRP, filing in June 2018 and rate increases at its gas and electric businesses support our 6% long-term growth rate as long as regulators approve the bulk of CMS' proposed investments. The IRP supports CMS' five-year, $11 billion investment plan, which is in line with our outlook.Michigan's regulatory environment has made great progress since the transformative 2008 energy legislation. A string of generally positive rate cases and the state's 2016 Energy Law have made Michigan one of the most constructive regulatory jurisdictions in the country and an attractive area for investment.Its 2018 gas and electric rate case settlements with 10% allowed returns on equity and other constructive rate mechanisms illustrate the favorable environment. If CMS can keep rate increases modest by controlling operating costs, the prospect of regulatory pushback will be less daunting.CMS' growth focuses on electric and gas distribution and renewable energy. We think these projects are positives for shareholders because they align with energy policy in Michigan and are likely to gain regulatory and political support. The planned Palisades nuclear plant retirement in 2022 and Michigan's 15% renewable portfolio standard by 2021 necessitates near-term investment. We think CMS can approach 25% renewables in the coming years with regulatory support.CMS carries an unusually large amount of debt at the parent level relative to peers. Parent leverage has helped produce impressive consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.CMS Energy is a holding company. The company has several subsidiaries, including: Consumers Energy Company, an electric and gas utility that serves individuals and businesses operating in the alternative energy, automotive, chemical, food, and metal products industries, as well as a group of other industries; CMS Enterprises Company, through its subsidiaries and equity investments, is engaged in domestic independent power production, including the development and operation of renewable generation, and the marketing of independent power production; and EnerBank USA, an industrial bank located in Utah that provides unsecured consumer installment loans, primarily for financing home improvements.
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