CMS Energy's Growth Gets Boost From Michigan's New Clean Energy Law

Strategist

Travis Miller

CMS Energy's decade-long transformation into a high-quality regulated utility positions it for a long runway of growth as long as Michigan regulators continue to support energy infrastructure investment. State clean energy legislation passed in 2023 should keep that investment growth going into the next decade.

CMS Energy's work with Michigan regulators and politicians has turned the state into an attractive area for utility investment. These constructive relationships will be critical as CMS executes its investment growth plan.

With regulatory and political backing, we expect CMS Energy to invest more than $17 billion during the next five years. That investment plan could expand if the firm receives regulatory backing for new projects that support Michigan's renewable energy growth targets. This should support annual earnings growth above 7% for most of the decade.

Michigan's 2008 energy legislation, additional reforms in the state's 2016 Energy Law, and new clean energy mandates in 2023 have transformed the state's utility regulation. As a result, CMS Energy has achieved a series of constructive settlements and regulatory decisions that support near- and long-term growth. Regulators approved CMS' most recent integrated resource plan and will review the company's renewable energy plan update starting in late 2024. 

If CMS can keep rate increases modest by controlling operating costs, we expect it will continue to get regulatory support and could even add to its current plan as much as $5 billion of investment in the next 10 years. Financing that growth will be a slight drag on earnings.

CMS' growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan's clean energy policies and is likely to earn regulatory support. CMS plans to retire its entire coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions at its electric business by 2040.

CMS carries an unusually large amount of parent debt. This has helped boost shareholders' returns on equity, but investors should consider the refinancing risk if credit markets tighten.

Business Strategy & Outlook

Service territory monopolies and efficient scale advantages are the primary moat sources for regulated utilities like CMS.

State and federal regulators grant CMS exclusive rights to charge customers rates that allow it to earn a fair return on and return of the capital it invests to build, operate, and maintain its generation, transmission, and distribution electricity and gas networks. In exchange for CMS' service territory monopoly, regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers.

We project CMS will earn a consistent spread over its cost of capital for the foreseeable future. CMS' regulated utilities have realized a string of mostly constructive rate outcomes. Legislation and political turnover during the last decade have helped turn the regulatory environment from below average to above average.

We think CMS will continue to get political and regulatory support to expand its investment in renewable energy, carbon emissions reductions, and reliability based on state policies. This should continue producing opportunities for value-accretive investment.

Michigan is among the states making a big push to decarbonize its economy by emphasizing natural gas and renewable energy in its energy mix. The state is embarking on a plan to reach net-zero carbon emissions by 2050. This gives CMS' investments both regulatory and political backing to ensure stable earned returns on new investments.

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Economic Moat

CMS Energy

CMS Energy Corp. is a holding company, which engages in the provision of electric and natural gas activities. It operates through the following business segments: Electric Utility, Gas Utility, and Enterprises. The Electric Utility segment consists of regulated activities associated with the generation, purchase, distribution, and sale of electricity in Michigan. The Gas Utility segment includes purchase, transmission, storage, distribution, and sale of natural gas in Michigan. The Enterprises segment is involved in domestic independent power production, including the development and operation of renewable generation, and the marketing of independent power production. The company was founded in 1987 and is headquartered in Jackson, MI.

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CMS Energy Corp. engages in the provision of electric and natural gas activities. It operates through the following business segments: Electric Utility, Gas Utility, and NorthStar Clean Energy. The Electric Utility segment focuses on generation, purchase, distribution, and sale of electricity. The Gas Utility segment includes purchase, transmission, storage, distribution, and sale of natural gas. The NorthStar Clean Energy segment is involved in domestic independent power production including the development and operation of renewable generation and the marketing of independent power production. The company was founded in 1987 and is headquartered in Jackson, MI.

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