CMS stock has under-performed since the Michigan Public Service Commission Staff provided its testimony on November 15. While the company’s demand and Staff’s recommendation are far apart (staff proposed 20% of ask, but not on a comparable basis), I believe the settlement will be fair and the allowed ROE will be between 10.25% and 10.5%. Most important, this allowed ROE will sustain earnings growth of 5-7% over the next five years and enable the company to trade at a premium to its peers.
As a reminder, in a rate-case earlier this year, Consumers Energy requested a revenue increase of $196 mm, premised on a rate-base of $7.538 Bln, a 42.07% equity and an allowed ROE of 10.7%. The Michigan Public Service Staff recommended a revenue increase of $39 mm, premised on a rate-base of $7.309 Bln, 42.07% equity and an allowed ROE of 9.95%.
I also like the holdCo bonds, which trade wider than BBB holdCo peers (approx 300 bp for the 2014).
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Disclaimer: I do not have a position in CMS and do not plan to initiate a position in the next 48 hours
As per my recovery estimates below, I believe the senior unsecureds offer the best risk/ return reward at this time. The unsecureds are trading below my worse case valuation and offer significant upside from these levels.
The main variables to these recovery estimates are: a)Natural gas prices; b) Bankruptcy Judge’s interpretation of the use of Bankruptcy Code 502(b)(6) to limit the claims arising from the rejection of the Roseton and Danskammer leases; and c) How long the bankruptcy process takes.
My favorite short ideas are Adaro (ADRO.JK) and Bumi (BUMI.JK)–Adaro due to the low calorific value of its coal and rich valuation. And Bumi due high leverage and rich valuation.
Fundamentals for thermal Indonesian coal are weak but Indonesian coal stocks have outperformed the broader markets over the past two months, setting up a short opportunity. Fundamentals are deteriorating due to softening in the major import markets such as China and India and a supply glut at a competitor for coal exports, South Africa. Most important, coal supply is slated to increase in 2012-13 due to post-floods normalization of exports in Australia and Columbia and greater port capacity in Indonesia.
Coal prices in China, the largest importer of thermal coal, are softening due to high inventory levels at the independent power producers and tight credit conditions, which constricts traders.
Coal demand is moderating in India due to the high price of imported coal–please see link to article regarding imported coal sitting at ports despite shortages due to high costs. Imported coal is >50% more expensive than domestic coal and even blending 10% imported coal can price out these power producers. Moreover, the recent depreciation of the Rupee versus the Dollar only exacerbates the problem.
Disclaimer: I have no positions in these companies and do not plan to initiate any positions in the next 48 hours.