Morningstar | Room for Constructive Compromise in CMS Energy Electric Rate Case
We are reaffirming our $40 fair value estimate and narrow moat rating for CMS Energy after the staff at the Michigan Public Utilities Commission released its opinion on CMS Energy's proposed 2019 electric rates. Although the staff recommended a rate cut, we think the details of the staff's case leave room for a rare settlement in line with our expectations.Most of the difference between the staff's $44 million rate cut recommendation and CMS Energy's $58 million rate increase proposal is a difference in allowed return on capital, which we think CMS will be willing to negotiate lower. CMS has requested a 10.75% return on equity, up from 10% now and above the staff's 9.75% recommendation. CMS' request is well above allowed returns other state regulators have granted recently.
We think CMS will be willing to negotiate a lower allowed return on capital and possible rate cut if it can achieve a decision prior to Jan. 1 when new rates are set to take effect. We also think CMS would be open to a lower allowed ROE if regulators approved its 2020 and 2021 investment recovery mechanism.
We think the key positive is that the staff's projection for CMS Energy's year-end 2019 rate base is less than 1% different from CMS Energy's proposal. This bodes well for regulators' review of CMS Energy's integrated resource plan, or IRP, which it filed in June. The IRP supports CMS' five-year, $10 billion investment plan, which is in line with our outlook. Rate base growth is the key driver of our projection for CMS Energy's 6% average annual long-term earnings and dividend growth.
Our earnings-growth rate forecast could go to 7% or 8% if regulators approve additional investment during the next 10 years or CMS continues achieving cost cuts. This could lead to a substantial increase in our fair value estimate. We continue to expect CMS Energy to earn within management's $2.30-$2.34 per share range this year.
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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