While acknowledging that the COVID-19 pandemic's long-term impact remains uncertain, Michigan-based DTE Energy Co. and CMS Energy Corp.'s management teams intend to press forward with planned capital investments to maintain and upgrade electric and natural gas distribution infrastructure and expand electric supply from natural gas and renewable energy sources. Given Michigan's constructive regulatory climate from an investor perspective and the Michigan Public Service Commission's adopted returns on equity above the prevailing industry averages in regard to recently decided electric and gas utility rate cases, we expect CMS and DTE to continue their record of solid profit growth in recent years through regulated utility investments. This analysis is an extension of our April 23 Financial Focus report "COVID-19 obstacles could give pause to utility capital expenditure plans."
CMS Energy's strategy in recent years has resulted in steady earnings growth: EPS in 2019 rose 6.9%, largely consistent with increases of 7.4% in 2018 and 2019. Management continues to target 6% to 8% long-term EPS and dividend growth, supported by a $12.25 billion utility investment plan between 2020 and 2024 focused primarily on its electric and gas utility segments, as well as renewable energy. The company indicates that in response to the COVID-19 pandemic, its utility Consumers Energy Co. has rescheduled some capital investment projects, but has not made any changes to its long-term capex program.
At the natural gas segment, which represents one-third of CMS' revenues, the company plans $5.0 billion of capital expenditures, including gas main and service replacements, as well as gas transmission and storage enhancements. Planned electric utility investments are expected to total $5.5 billion, focusing on electric distribution improvements, including substation strengthening and pole replacement. Consumers Energy also expects to invest in electric supply projects, primarily new renewable generation.
Consumers Energy currently has rate cases pending before the Michigan PSC, with the company seeking a $244.4 million increase in electric base rates to make investments associated with system reliability and enhanced technology, and a $244.7 million increase in gas base rates needed for ongoing investments in gas utility assets to provide safe, reliable and efficient service, among other factors. Michigan PSC staff recommended that the commission authorize the utility a $139.1 million increase. For additional detail, see the April 16, RRA Regulatory Focus report "Mich. PSC staff recommends lower gas rate hike than sought by Consumers Energy."
S&P Global Market Intelligence consensus estimates project 2020 EPS growth at the low end of CMS Energy's 6% to 8% growth target while expanding 8% in each of 2021 and 2022.
DTE’s strategy continues to focus on achieving long-term earnings growth through investments in base infrastructure and new generation intended to improve customer reliability and to comply with environmental requirements. DTE reported flat EPS of $6.30 in 2019 that surpassed Wall Street estimates, following 12.7% and 5.9% increases in 2018 and 2017, respectively. Looking ahead, management expects 5% to 7% operating EPS growth through 2024, and 7% dividend increases in each of 2021 following a similar increase in 2020.
DTE's utilities DTE Electric Co. and DTE Gas Co. account for more than three-quarters of DTE's 2020-2024 capital investment program that could reach upwards of $19 billion. DTE Electric's planned capital investments are estimated at $12.0 billion, with three-quarters allocated for distribution infrastructure and new generation, and the remainder for capital replacements and other projects. Earlier in April, Michigan regulators unanimously approved DTE Electric's revised integrated resource plan, which envisions coal-fired generating retirements and energy waste reductions and demand response additions. DTE Gas plans capital investments of $3 billion including spending for base infrastructure, gas main renewal and pipeline integrity programs. Nonutility investments, including gas storage and pipelines and power and industrial projects, are estimated in a range of $3.2 billion to $4.1 billion and include spending for gathering and pipeline investments and expansions as well as industrial energy services and renewable natural gas projects.
Like CMS, DTE has been active in the regulatory arena of late. In late March, the Michigan PSC staff recommended that the commission authorize DTE Gas a $92.4 million increase in gas base rates, compared to the company's requested $203.8 million increase to support increased investment and modernization of its natural gas infrastructure. On March 5, a Michigan PSC administrative law judge recommended that the PSC authorize DTE Electric a permanent increase in electric rates of $99.8 million, less than one-third of that requested by the utility. DTE Electric had filed in July 2019 for a $350.7 million base rate increase to recover capital costs associated with generation and distribution system investments, capital structure cost changes, and increased operation and maintenance expenses due to inflation.
Stock market performance
Through April 28, the CMS Energy shares were down nearly 6%, outperforming the multi-utility group's average 11.9% decline. By comparison, the DTE Energy shares were the third-worst performer in the group year-to-date, down 18.1%. Regarding its nonutility operations, Fitch Ratings on April 15, lowered the parent company's long-term issuer default rating to BBB from BBB+ in light of higher leverage and business risk associated with its $2.65 billion late-2019 acquisition of a midstream pipeline and gathering system in Louisiana's Haynesville Shale.
Regulatory Research Associates is a group within S&P Global Market Intelligence.
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Charlotte Cox contributed to this article.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.