Morningstar | CMS' Recent Regulatory Success Sets Foundation for Hitting 6%-8% Growth Target
We are reaffirming our $42 fair value estimate for CMS Energy after the company reported earning $0.75 per share in the first quarter of 2019, down from $0.86 in the first quarter of 2018. We are also reaffirming our narrow moat and stable moat trend ratings. Management’s 2019 EPS guidance of $2.47-$2.51 remains in line with our estimate.The first-quarter drop in earnings, due primarily to $0.10 per share of excess storm costs, does not change our outlook for 2019 or beyond. We anticipate weather also could be a year-over-year drag based on favorable 2018 weather. Rate increases later in the year and core usage growth should offset some of that drag.
We continue to assume that CMS can achieve 6% average annual growth for at least the next three years with good certainty based on transparent investment projects and regulatory support. Management recently boosted its five-year capital spending plan to $11 billion, increasing the likelihood that it can achieve its 6%-8% annual earnings and dividend growth targets.
We expect CMS will try to replicate its constructive electric rate case settlement during its gas rate case negotiations later this year. Another constructive regulatory outcome would give us increasing confidence that Michigan has transitioned to a top-tier regulatory environment.
We give CMS particular credit for negotiating an integrated resource plan settlement that includes the financial compensation mechanism and rights to a 50% share of new solar development. We consider this another constructive regulatory outcome that gives us confidence that CMS can meet its investment and growth targets.
The FCM allows CMS to collect a return on capital on power purchase agreements. This has two benefits for shareholders: I t improves the cost-competitiveness of CMS' self-build proposals and it reduces possible earnings dilution if regulators choose PPAs over CMS' self-build options.
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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