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Morningstar | Management Meeting: CMS Benefits From Low Political, Regulatory Risk

We are raising our fair value estimate for CMS Energy to $43 per share from $42 after incorporating time-value appreciation and increased confidence that it can achieve its near-term growth investment plan with regulatory and political support. We are reaffirming our narrow moat and stable moat trend ratings.

We recently met with management at the American Gas Association Financial Conference to discuss the changing political and regulatory landscape in Michigan. After big accomplishments with the state Energy Law in 2016 and the 2018 electric resource plan settlement, CMS enters a multiyear stretch with no major political or regulatory needs at its electric utility.

We think CMS can resolve its pending gas rate case with little acrimony. Its rate increase request is $58 million higher than the regulatory staff’s recommendation after CMS’ recent adjustment. That gap closes to nearly $20 million by normalizing both calculations to CMS’ current 10% allowed return on equity. That difference is immaterial to our growth estimate and fair value estimate.

We await new Gov. Gretchen Whitmer’s choice to replace state commissioner Norm Saari, whose term ends in July, on the three-person commission. Recent legislation reduces much of CMS’ regulatory uncertainty for several years. The new commissioner likely won’t have a chance to make a significant ruling until late next year at the earliest.

We continue to assume CMS can grow earnings 7% annually on average the next five years based on $11 billion of capital investment and regulatory support.