Summary:
Risks:
CMS Energy’s investments in infrastructure development projects, replacement of
aged infrastructure and application of smart technologies will enable it to provide
reliable services to customers. The company's sustained efforts to expand its
renewable portfolio are also impressive. However, stringent environmental
regulations, volatile commodity prices and risks related to impending regulatory cases
could deter growth. Moreover, weather variations tend to impact the demand for
electricity and natural gas, thereby leading to a fluctuating performance.
Reasons To Buy:
- CMS Energy’s regulated electric power operations in Michigan generate a relatively stable and growing earnings stream. It is currently focusing on several issues such as capacity maximization, reliability improvement, clean power generation and infrastructure upgrade. The company plans to spend $17 billion between 2016 and 2025, the majority of which will be directed toward infrastructure development projects. This includes $8.6 billion that has been allocated for 2020. These initiatives will enable the company to provide reliable services to its customers and achieve its long-term EPS growth target of 5–7% in 2016 and 6–8% in 2017. Moreover, capital investments have helped the company to reduce operation and maintenance costs by 4% over the 2014–2015 period. CMS Energy further projects to reduce these costs by at least 10% by 2018.
- Under the electric utility operations, CMS Energy focuses on strengthening circuits and substations, replacing aging poles and installing smart meters. Between 2016 and 2025, the company plans to invest around $10.77 billion in its electricity operations, including roughly $3.41 billion for electricity reliability and distribution activities. Meanwhile, the company plans to invest around $5.3 billion through 2020 in its electricity operations, including roughly $2.0 billion for electricity reliability and distribution activities. The company expects overall sales growth of about 1% on a conservative side at its utility operations through 2020.
- CMS Energy has a large natural gas system in place and plans to expand it over the next decade. The company plans to deploy around $6.23 billion for its projects under gas operations between 2016 and 2025. This ambitious growth plan includes $1.6 billion for the replacement of aging infrastructure and improvement of service reliability over the next five years. Addition of the Jackson gas-fired plant will add flexibility, while reducing operating costs. Major expansion of the Ludington Pumped Storage facility will further benefit the company’s portfolio.
- We appreciate CMS Energy’s sustained efforts to expand its renewable portfolio. In 2014, the company’s Consumers Energy unit achieved its renewable capacity target of 10% per year earlier than expected with the completion of the 111-MW Cross Winds Energy Park. At 2015 end, Consumers Energy had wind and hydroelectric generation capacity of 34 MW and 1,069 MW, respectively. Through 2020, the company plans to spend around $0.7 billion on environmental programs required to comply with state and federal laws and regulations. In addition, CMS Energy continues to expand its solar operations. In Apr 2016, the company brought on-line the first large-scale solar project at Grand Valley State University. The company is constructing a second site at Western Michigan University, which is expected to commence operations by the end of 2016 summer. A site in the Lansing area is also under consideration. By the end of 2016, the company plans to have 10 MW of utility scale solar on its system. These additions will increase its renewable energy share above 10% that was mandated in the 2008 energy law.
- CMS Energy maintains a stable liquidity position, besides exhibiting a strong cash generating capacity. As of Mar 31, 2016, cash and cash equivalents were $177 million. In the first quarter, the company generated cash of $632 million from operating activities. Besides investing in infrastructure projects, a favorable financial position enables CMS Energy to pay dividends at regular intervals. In Jan 2016, the company increased its quarterly dividend to $0.31 per share, up 7% from $0.29, maintaining a dividend payout ratio of 62%. The company expects dividend growth to be in line with its EPS growth guidance of 5–6% for 2016 and 6–8% for 2017. This initiative will enable the company to retain investor interest in the stock.
- Despite executing several pollution-control measures at its power generating facilities, increasing stringency of environmental regulations on curbing carbon emissions during electricity generation remains a major concern. At present coal accounts for about 33% of its total generation mix. Meeting environmental regulations require the company to invest increasingly in low emission infrastructure at its generation systems that would in turn affect its margins.
- CMS Energy’s businesses are sensitive to commodity prices. An upward movement in fuel prices could increase the company’s cost of operations.
- Adverse decisions in regulatory cases may negatively impact CMS Energy’s earnings. Profitability of regulated utilities depends upon rate relief at regular intervals in Michigan. Although the company can self-implement its requested rate hike for six months, an adverse rate case decision will force the company to refund the incremental bill charged to its customers.
- Weather conditions have a significant impact on the demand for electricity and natural gas. A milder winter or a cooler summer in CMS Energy’s service territories results in reduced utility usage, thereby affecting its financial performance.
