It’s hard to believe that 20 years ago CMS Energy (CMS) was a pariah in its home state of Michigan, recalls Roger Conrad, utility sector specialist and editor of Conrad's Utility Investor.
The long-time CEO had exited in disgrace, after spectacularly failing to convert the electric and gas utility into a mini-Enron. And the company was floundering in debt and bad will from regulators and customers.
That’s when incoming management decided being a utility was good enough. They systematically repaired relations with customers and regulators, boosted efficiency, cut debt and squeezed out costs. And the result is a roughly 1,000 percent 20-year total return for investors.
CMS today is still laser-focused on the micro to achieve superior returns. Guidance annual earnings and dividend growth through 2026 is industry standard at 6 to 8 percent a year. And like most utilities, the primary driver is CAPEX that’s pre-approved by state regulators.
What sets CMS apart from its peers is first the extraordinary level of support from Michiganders for its plans. For example, the Public Service Commission approved its 20-year integrated resource plan with support from customer and environmental groups, energy industry representatives and the state attorney general — all frequent adversaries of utilities in many states.
Second, CMS’ five-year $14.3 billion CAPEX budget focuses on spending to reduce operating costs. And resulting savings passed onto customers to offset the impact on actual rates of rate base growth fueling higher earnings and dividends.
The company's integrated resources plan envisions $600 million in annual savings through 2040 in part by phasing out all of the company’s aging coal-fired electricity 15 years faster than expected in 2025. The utility will also buy out high priced power purchase contracts once mandated by the state by acquiring 2.16 gigawatts of natural gas-fired generation.
Reducing gas system leaks and boosting energy efficiency programs is cutting waste. So will employing digital technology through smart meters and automation. And 8 gigawatts of new solar capacity and 550 megawatts of battery storage systemwide by 2040 will slash fuel costs
The bottom line is an exceptionally sustainable business plan set to produce ultra-reliable shareholder returns. CMS is a buy for even the most conservative at $68 or lower.
