Earnings Call Transcript - CMS Q4 2020

Operator, Operator

Good morning everyone and welcome to the CMS Energy Fourth Quarter 2020 Results. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section. This call is being recorded. After the presentation, we will conduct the question and answer session. Instructions will be provided at that time. Just a reminder, there will be a rebroadcast of this call today beginning at 12:00 p.m. Eastern Time running through February. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section. At this time, I would like to turn the call over to Mr. Sri Maddipati, Vice President of Treasury and Investor Relations. Please go ahead.

Sri Maddipati, Vice President of Treasury and Investor Relations

Thank you, Rocco. Good morning everyone, and thank you for joining us today. With me are Garrick Rochow, President and Chief Executive Officer; and Rejji Hayes, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements, which are subject to risk and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website. Now, I will turn the call over to Garrick.

Garrick Rochow, President and CEO

Thank you, Sri, and thank you everyone for joining us today. I've had the pleasure of meeting many of you over the past couple of months as I transitioned into the CEO role. I'm excited to be hosting my first earnings call and sharing yet another year of consistent industry-leading financial performance. Before I discuss our year-end results and our updated five-year capital investment plan, I want to take a moment to reiterate our simple but powerful investment thesis. Well, simple to put on paper, it's not even replicable. And that is what sets us apart. It starts with our industry-leading commitment to the clean energy and gas systems to achieve decarbonization. These investment opportunities are supported by constructive energy legislation as well as alignment with the commission and the MPSC staff. This strong regulatory and legislative framework is why Michigan is consistently ranked as a top-tier regulatory jurisdiction. But investment opportunity and a supportive regulatory environment are not enough. Our focus on affordability is critical. So our customers can afford these investments. Now, I've been with the company for 18 years, much of it in operations. Over that time, we've demonstrated our ability to consistently manage costs while investing in the safety and reliability of our systems, while improving customer service. That ability to manage costs is not driven from the top down, but from the bottom up. It's our 500 coworkers who are committed to excellence, delivering the highest value to our customers at the lowest cost possible. This is embedded in our culture, and it was built in partnership with our union over the last two decades. These unique attributes to the CMS story allow us to deliver for customers and for you, our investors. Our adjusted EPS growth of 68% combined with our dividend provides a premium total shareholder return of 9% to 11%. Our ability to deliver this growth consistently, regardless of weather, a global pandemic, who's leading our state, our commission or our company, is something we are uniquely capable of doing. In 2020, we delivered adjusted earnings per share of $2.67, up 7% from 2019, and achieved operating cash flow of almost $2 billion, excluding $700 million of voluntary pension contributions in 2020. Today, we're raising our adjusted EPS guidance for 2021 by a penny to $2.83 to $2.87, focusing on the midpoint. This reflects annual growth of 6% to 8% from our 2020 results. Last month, we announced our 15th dividend increase in as many years, $1.74 per share, up 7% from the prior year. We continue to target long-term annual earnings and dividend per share growth of 6% to 8%, again, focusing on the midpoint. Today, we're also increasing our five-year capital plan to $13.2 billion, up $1 billion from our prior plan, marking 18 consecutive years of industry-leading financial performance. I’m pleased with our financial performance. But equally important is our commitment to the triple bottom line. We balance everything we do for our coworkers, customers, and the communities we serve, our planet and our investors, as demonstrated on slide six. 2020 was a tough year for everyone. The global pandemic impacted all of us emotionally, physically and financially. Through it all, I am proud of the work done by our coworkers. We were able to provide over $80 million of support to our customers and communities in 2020 through support programs, low-income assistance, donations to foundations, and reinvestment to improve safety and reliability. We focused our efforts on COVID relief for residential and small business customers, payment forgiveness, as well as enhanced support in the area of diversity, equity, and inclusion. Despite changing our work practices as a result of a pandemic, we maintain first portal employee engagement, achieved first portal customer experience and attracted 126 megawatts of new load to our state, which brings with it significant investment in over 4000 new jobs. From a planet perspective, we continue to lead the clean energy transition. We added over 800 megawatts of new wind and are executing on 300 megawatts of new solar, the first tranche of our integrated resource plan. Further in our commitment, over $700 million of investments were made to advance our clean energy transition. Additionally, our demand response and energy efficiency programs continue to save our customers money, reduce carbon and earn an incentive. And last, but certainly not least, we finished the year with more than $100 million in cost savings driven by the CE WAY. Many of you have asked about my commitment to the CE WAY. A light blue arrow at the bottom on the slide and my experience leading this operating system over the past five years should be a strong signal. I'll tell you this: we are positioned well. But there is still more opportunity. Through the CE WAY, we will continue to improve reliability, reduce waste, and deliver better customer service. And that’s just the tip of the iceberg. There are opportunities in every corner of the company to achieve excellence through the CE WAY. My coworkers and I remain committed. We will continue to lead the clean energy transition with support from our new five-year $13.2 billion capital investment plan, which translates to over 7% annual rate base growth and focuses on enhancing the safety and reliability of our system as we move toward net zero carbon and methane emissions. In fact, 40% of our plan directly supports our clean energy transition, and includes our renewable generation, electric distribution and investments to support this generation, grid monetization, as well as programs like our main invented service replacement programs, which reduce methane emissions. In addition to our traditional rate base returns, our wind investments, renewable PPAs and demand response resources are supported by regulatory incentives above and beyond our ROEs. These incremental earnings mechanisms enhance our earned returns, and combined with our investments in clean energy, our growing percentage of our earnings mix. Our customer's ability to afford the investments in our system is complemented by our continued focus on cost savings. Over the last decade, we have reduced the utility bill as a percentage of the customer's wallet. And we continue to see further opportunity to reduce costs in the future. We have unique cost-saving opportunities relative to peers and above-market PPAs, Palisades and MCV, which will generate nearly $140 million of power supply cost recovery savings. This, coupled with the future retirement of our remaining coal facilities, provides over $200 million in savings for our customers. These structural cost savings combined with the productivity we'll deliver through the CE WAY will ensure we deliver on our capital plan and keep customer bills affordable. Now the great thing about the CE WAY is it delivers more than cost savings. What makes us unique is our engaged coworkers. We value our best-in-sector employee engagement. Our 8500 coworkers work every day to deliver the best value for our customers. This engaged workforce has doubled productivity, which has enabled us to consistently increase our capital plan without significantly increasing our workforce. Furthermore, we have never served our customers better as we've moved from the bottom quartile to top quartile, not just in the utility industry, but across all industries. Slide nine serves as an excellent illustration of how our team leveraged the CE WAY to deliver on our triple bottom line. Our ability to deliver this level of excellence for our customers and investors is supported by Michigan's constructive regulatory environment. We benefit from a legislative and regulatory construct that supports our rate case proceeding and the statute that allows financial incentives above and beyond our authorized ROE. Michigan's regulatory jurisdiction has been ranked in the top tier since 2013. That's not by accident. It's a reflection of the hard work my coworkers do every day to earn the trust of our customers, policymakers, environmental groups and the MPSC staff. We are proud to have a commission that demonstrates strong leadership with diverse backgrounds, which was enhanced with the appointment of Commissioner Paratek. We welcome Commissioner Paratek and look forward to working with her in the future. Turning to slide 11, we have a light regulatory docket with no financially significant regulatory outcomes in 2021. With the approval of our Karn securitization and electric rate case in December of last year, we'll file our next electric rate case in the first quarter and our gas rate case in December of this year. Notably, we will file the next iteration of our integrated resource plan in June. I'm sure many of you would like a sneak peek, but it’s too early. We're in the midst of the modeling phase. You can be confident that this next iteration will continue to build on industry-leading clean energy commitments. We’ll find ways to get cleaner, faster, and incorporate storage and customer-driven solutions as they become more cost-effective. Beyond that, please stay tuned until our second quarter earnings call. We will provide more information after we file. I'll turn the call over to Rejji.

Rejji Hayes, Executive Vice President and CFO

Thank you, Garrick and good morning, everyone. We're pleased to report our 2020 adjusted net income of $764 million, or $2.67 per share, up 7% year-over-year from our 2019 actuals. Now briefly note that our adjusted EPS excludes select non-recurring items previously discussed in our third-quarter earnings call and enumerated in this morning's releases. To elaborate on the key drivers of our year-end results, we realized increases in rate relief, net investments due to constructive orders and our recent gas and electric rate cases, strong performance in our non-utility segments, and most notably, our historic company-wide cost reduction efforts led by the CE WAY, which Garrick noted earlier. These positive factors were partially offset by mild weather and reinvestment we flexed up back into the business. We've talked in the past about our practice of flexing up, which enables us to put financial upside to work in the second half of the year, to pull ahead or commit to work to improve the safety and reliability of our gas and electric systems, to fund customer support programs, which was particularly important in 2020, given the effects of the pandemic, to invest in coworker training programs, and de-risk our financial plan in subsequent years. This tried and true approach benefits all stakeholders, which is the essence of the triple bottom line of people, planet and profit. On slide 13, you'll note that we met our key financial objectives for the year. To avoid being repetitive with Garrick's earlier remarks, I'll just note that we invested $2.3 billion of capital in our electric and gas infrastructure to benefit customers including investments in wind farms, which add approximately $500 million of RPS-related rate base, which earns a premium return on equity of 10.7%. I'll also note that our treasury team had a banner year, successfully raising approximately $3.5 billion of cost-effective capital, which included roughly $250 million of equity while navigating turbulent capital market conditions over the course of 2020. These efforts further strengthen our balance sheet to the benefit of customers and investors. Turning the page to 2021. As mentioned, we are raising our 2021 adjusted earnings guidance to $2.83 to $2.87 per share, which implies 6% to 8% annual growth over 2020 actuals. Unsurprisingly, the majority of our growth will be driven by the utility. I'll also note a modest level of anticipated upside at the parent and other segments in 2021, largely due to the absence of select non-operating flex items executed in 2020. All in, we will continue to target the midpoint of our consolidated EPS growth range of 7% at year end, which is in excess of the sector average. To elaborate on the glide path to achieving our 2021 EPS guidance range, as you'll note in the waterfall chart on slide 15, we'll plan for normal weather, which amounts to $0.06 per share, a positive year-over-year variance given the mild winter weather experienced in 2020. Additionally, we anticipate $0.41 of the EPS pickup in 2021 attributable to rate relief, net investment costs largely driven by the orders received in the second half of 2020. It is also worth noting that the magnitude of EPS impact is in part due to the absence of an electric rate increase in 2020, which was a condition of our 2019 settlement agreement. While we do plan to file an electric case in Q1 of this year, as Garrick mentioned, that test year and economic impacts for that case will commence in 2022. As we look at our cost structure in 2021, you'll note approximately $0.27 per share of negative variance attributable to incremental O&M approved in our recent rate cases to support key initiatives around safety, reliability, customer experience, and decarbonization. Needless to say, we have underlying assumptions around productivity and waste elimination driven by the CE WAY, and we'll always endeavor to overachieve on those targets while delivering substantial value for our customers. Lastly, we apply our usual conservative assumptions around sales, financings, and other items. I’ll note that while the pandemic remains relatively uncontained, we're assuming a gradual return of weather-normalized load to pre-pandemic levels around mid-year. In the event the mass teleworking trend persists and/or we see an accelerated reopening of the Michigan economy, we could potentially see some upside from incremental residential and commercial margin. As always, we'll adapt to changing conditions and circumstances throughout the year to mitigate risks and increase the likelihood of meeting our operational and financial objectives. We're often asked whether we can sustain our consistent industry-leading growth in the long term given widespread concerns about economic conditions or potential changes in fiscal energy and/or environmental policy. Our answer remains the same: irrespective of the circumstances, we view it as our job to do the work for you. Our EPS charge on slide 16 illustrates one of our key strengths, which is to identify and eliminate financial risk and capitalize on opportunities as they emerge to deliver additional benefits to customers, while sustaining our financial success over the long term for investors. Each year provides a different fact pattern, and we've always risen to the occasion. 2020 offered some unique challenges resulting from the pandemic and some familiar sources of risk in the form of mild winter weather. As usual, we didn't make excuses. Instead, we offered transparency, devised our course of action, and counted on the perennial will of our 8500 coworkers to deliver for our customers, the communities we serve, and for you, our investors. To summarize our financial objectives in the near and long term, we expect 6% to 8%, adjusted EPS and dividend growth and strong operating cash flow generation. From the balance sheet perspective, we continue to target solid investment-grade credit ratings, and we'll manage the key credit metrics accordingly. One item I'll note in this regard is that we have slightly modified our FFO to debt targets to align better with the various rating agency methodologies. Given the increase in our five-year capital plan, we anticipate annual equity needs of up to $250 million in 2021 and beyond, which we are confident that we can comfortably raise through our equity drip program to minimize pricing risk. Two additional items I'll mention with respect to our financial strength as we kick off 2021 that are not on the page but no less important, are that we concluded 2020 with $1.6 billion of net liquidity, which positions our balance sheet well as we execute our updated capital plan going forward, and we have fully funded benefit plans for the second year in a row due to proactive funding, benefiting roughly 3,000 of our active coworkers and 8,000 of our retirees. Our model has served and will continue to serve all stakeholders well. Our customers receive safe, reliable, and clean energy at affordable prices, while our coworkers remain engaged, well trained and cared for in our purpose-driven organization, and our investors benefit from consistent industry-leading financial performance. To conclude my prepared remarks on slide 18, we've refreshed our sensitivity analysis on key variables for your modeling assumptions. As you'll note, with reasonable planning assumptions, rate orders already in place and our track record of risk mitigation, the probability of large variances from our plan is minimized. With that, I'll hand it back to Garrick for some final comments before Q&A.

Garrick Rochow, President and CEO

Thank you, Rejji. Our investment thesis remains simple but unique. It enables us to deliver for all our stakeholders, year-in and year-out. We remain committed to lead the clean energy transition, excellence through the CE WAY, and delivering a premium total shareholder return through continued capital investment. The benefits that triple bottom line. With that, Rocco, please open the lines for Q&A.

Operator, Operator

Thank you very much, Garrick. Today's first question comes from Jeremy Tonet with JP Morgan. Please go ahead.

Jeremy Tonet, Analyst

Hi, good morning.

Garrick Rochow, President and CEO

Good morning, Jeremy.

Jeremy Tonet, Analyst

Thank you. I wanted to start by discussing the deployment of capital expenditures in renewables. It seems to have increased recently. I'm curious about your outlook on how this might evolve over time. Additionally, I would like to clarify the information on slide 22 regarding clean energy generation. Can you specify how much of that spending is regulated versus non-regulated? Thank you.

Garrick Rochow, President and CEO

Yes. Thanks for your question. Let's just talk broadly about the renewables and the likes. So first of all, we have industry-leading commitments. And I want to be clear about that; it is one of the best in the industry out there. It's an aggressive plan from a buildout perspective. In our current integrated resource plan, we have 1.1 gigawatts of solar that are part of the buildout with a broader plan of six gigawatts of solar. And then, in the course of this integrated resource plan is Rev 2, which we'll file in June; we'll continue to advance our aggressive plans and our leadership in the clean energy transition. So what you're picking up in our capital plan, the additional $1 billion, you're right on the mark, Jeremy, there's more renewables to the tune of about $200 million of additional solar and renewables in that plan. There's $200 million of hydro. And that might be surprising for some, but that's the original renewable, that's carbon-free. If you think about our Ludington Pumped storage facility, which is the largest, fourth largest in the world, it provides an important role in intermittency. There's $300 million for electric reliability to improve service out there, but also to prepare the grid for the future. And then the balance is made up of investments in our gas system to further decarbonize. And so those are the important pieces. When we think about our investments on slide 22, specifically, and the investments there. Right now, our integrated resource plan is a 50/50 split between purchase power agreement and build, own, transfer. Now, because of our renewable energy plan commitments, and we're building that wind to support that, that’s greater than 50/50. But let's talk about the 50/50 for a minute. All those PPAs, we are one of the few in the industry, and certainly a leader in the industry to get a financial compensation mechanism associated with that. The rest come through build, own, transfer. Now, as we think about our second IRP, we're going to take a strong look at what that mix looks like. So that will be something we explore and grow and certainly will be part of our integrated resource plan for the future. Now, I'm going to pass it over to Rejji too because I know he has some additional thoughts to offer on this as well.

Rejji Hayes, Executive Vice President and CFO

Thank you, Garrick. Jeremy, I would like to add to Garrick's insightful comments. I’m not sure if this addresses another aspect of your question, but all the capital expenditures we’ve discussed on this call, including the $13.2 billion and the $2.4 billion for clean energy generation that you can find on page 22, are intended for the regulated utility, Consumers Energy. Therefore, all the capital investments we're mentioning are designated for the regulated utility.

Jeremy Tonet, Analyst

That's very helpful. Thank you for clarifying that. And I just want to turn to the balance sheet a little bit there. I guess that see the equity, you talked about stepped up a little bit there on up to $250 million. And just wondering if you might be able to provide more color, if that kind of ratable across years? Or if that could be kind of more or less in a given year. And there's really the driver there just kind of step up in CapEx this year? Or any other color you could provide there would be great.

Rejji Hayes, Executive Vice President and CFO

Jeremy, I say starting with the second part of your question first, it really is a ratable increase with the capital investment plan which obviously has increased by a $1 billion vintage over vintage. And so, because of the capital plan increasing by a $1 billion, we've had the equity needs increase roughly commensurate with that. The prior plan as you know is about $150 million per year run rate. Now, we're at $250 million. Now, when you think about that distribution over the next five years, while we may be opportunistic, some years it may be around $250 million, some years a little less, we'll look at where the market is and how receptive it is to our currency. We'll look at the price of our stock, obviously. And I will just add, the first $250 million that we're planning to do in 2021, we've already taken about 20% of that pricing risk off the table as we executed in the back half of 2020. And so we'll be opportunistic. I wouldn't say it's going to be a clean $250 million each year, but that's the target. Some years a little more, some years a little less. And so when I say a little more, up to $250 million at the ceiling and maybe in some years be less than that, just to be very clear.

Jeremy Tonet, Analyst

That's super helpful. I'll stop there. Thank you.

Rejji Hayes, Executive Vice President and CFO

Thanks.

Operator, Operator

And our next question today comes from Shahriar Pourreza with Guggenheim Partners. Please go ahead.

Unidentified Analyst, Analyst

Hi, good morning, and congratulations on this. It's actually Constantine here for Shahriar.

Garrick Rochow, President and CEO

Hi, Constantine.

Unidentified Analyst, Analyst

Hey. Just a quick one on kind of the clean energy mix for CMS. You've outlined some reductions in kind of coal and rate base and Campbell's obviously still a decade away. Without kind of jumping into the IRP, obviously, can you kind of talk about the opportunity of moving the retirements ahead? And any thresholds that you kind of envision for kind of moving those dates around, especially as replacement economics start to improve for that power?

Garrick Rochow, President and CEO

Yes. Thanks for your question. We're in the process of our integrated resource plan, I call it 2.0 or Rev 2, looking at that. Over the course of my career, we had 12 coal plants, and we're down to our remaining five: Karn 1 and 2 from IRP 1.0 are slated for retirement in 2023. Right now, in this IRP, for 2.0, we're looking at the potential for early acceleration, early retirement for Campbell 1 and 2. Right now, their date is 2031, and we're evaluating whether that pulls forward or not. That modeling is underway. There are a number of things we look at in that modeling. We're looking at the reliability of the grid, the impact of coworkers, obviously to benefit the plan, but also the balance sheet. What's the remaining book value, securitization impact, and how does that play on the credit metrics? What is the capital buildout? There are a variety of variables that go into that. That is certainly something that's under consideration. We’ve put that in the context of what's going on with the Biden administration and some of the ambitions around that from the plan perspective, which we support. That also factors into our thinking on our coal plants.

Unidentified Analyst, Analyst

That's very insightful. Shifting focus to planning assumptions and low growth, 2020 was quite a volatile year with significant changes in the mix. Garrick mentioned a return to normal by the end of 2021. Do you expect residential load trends to continue as they have been, and generally to be somewhat higher? How does this influence the need for flexibility, and as we move into 2021, will there be a reset to the baseline or more of a return to normal by the end of the year?

Garrick Rochow, President and CEO

Well, I start off with the big picture, which is slide 16. Every year, when there's work to do, we get after it, and we flex our CE WAY muscle and find savings opportunities, and then we reinvest it. So, again, we've positioned well for 2021. That's the broad message. I mean, specifically from a sales perspective, residential sales, as we talked in Q3 and still here in Q4, are a bit sticky as people are working from home, and many schools are still virtual. But as we see this pandemic playing out, we anticipate that those will decline as you might expect as people go back to the traditional workplace and as kids return to school. Also, we expect the commercial sales to grow a little bit. Restaurants have been opened up here recently, some limited capacity, but those will continue to grow, particularly as vaccines are more readily available and distributed across Michigan. Again, there's not aggressive assumptions in there. It's very conservative assumptions, as you might expect from us, really returning to some pre-pandemic levels, just as we shared. From an O&M flex perspective, as I shared earlier, we feel like we're well-positioned for 2021. We've done a lot of reinvestment for our customers at the end of the year toward the tune of $0.18, that not only helps our customers and provides benefits, but it de-risks 2021. Now, the weather could be mild in the winter, it could be a cool summer and there's still pandemic out there, but rest assured what we do each and every year is we don’t reset, we don’t carve out. We get after it and we flex that CE WAY muscle and deliver. So, no matter what the year throws at us, I'm prepared, we're prepared as a team, and I'm confident in the guidance we've provided.

Unidentified Analyst, Analyst

Thanks, Garrick. That was wonderful. I'll jump back in queue.

Operator, Operator

And our next question today comes from Michael Weinstein with Credit Suisse. Please go ahead.

Michael Weinstein, Analyst

Hi, good morning, guys.

Garrick Rochow, President and CEO

Hi, Michael.

Michael Weinstein, Analyst

Just thinking about the IRP filings come up. Does the $250 million of equity already contemplate sort of the range of possible things that you've been thinking of in that filing? Or should we expect to see some changes to that equity needs as a result of the plan?

Rejji Hayes, Executive Vice President and CFO

Yes, Michael, this is Rejji. I'll just say that the equity issuance means that we have laid out our reflective of $13.2 billion capital plan. Then had some IRP-related capital investments. Remember, we're still executing on the first tranche of the 1.1 gigawatts of solar that we provided, and the IRP that was approved in June of 19. Some of that will roll into the outer years of this plan. This is what that equity will support. We have not been too speculative as to what will come out of IRP; we have 2.0, and we'll see where the outcomes take us. But remember, it's a 10-month, potentially 12-month process. So if we file in mid-2021 as planned, we'll get an outcome around mid-2022. That's a three-year board approval. My sense is, you'll see more of the results of that reflected in the next vintage of our five-year plan, which will roll out obviously in Q1 of next year. So for now, we're comfortable with a $250 million per year of equity funding this $13.2 billion plan.

Michael Weinstein, Analyst

That makes sense. Is the approval related to this three-year period? Could you provide some insight into the interest in Michigan for a multi-year settlement regarding rates, potentially aligning with a three-year IRP? I'm curious about the possibilities there and the company’s interest in such arrangements. In the past, you’ve expressed satisfaction with the results of annual rate cases, so I’m interested in the prospects for something different.

Garrick Rochow, President and CEO

We're still focused on using an annual rate case approach for several reasons. First, as we implement our CE WAY and identify savings opportunities, we can pass those savings back to our customers. This creates room for our ambitious capital investment plans. Therefore, this strategy is effective for us and we intend to continue in this direction for some time.

Michael Weinstein, Analyst

Right. There's nothing legally, it's not legally blocking that type of outcome, right? I mean, is it allowed in Michigan to have a multi-year plan?

Garrick Rochow, President and CEO

No. There's nothing legally that's blocking it. We've explored it at times. Again, we feel this is the best option for our strategy, the annual rate case.

Operator, Operator

And our next question today comes from Julien Dumoulin-Smith with Bank of America. Please go ahead.

Julien Dumoulin-Smith, Analyst

Good morning, team. Thank you for the opportunity, and congratulations, Garrick. I wanted to follow up on the question regarding the IRP and how it relates to the CapEx update. Although we're still in the early stages, I would like to clarify regarding the Campbell coal plant. You've already adjusted the timeline somewhat. Is it possible that we could receive an update on the five-year plan next year? There is one larger plant with a long retirement timeline; could this be included in the five-year window? Would that affect the five-year CapEx? I just want to ensure clarity on that. Additionally, I know you are increasing CapEx for clean energy, and I want to confirm that this does not factor in any outcomes from the IRP, just to be clear.

Garrick Rochow, President and CEO

Julien, thanks for your question. I think it's going to feel like a little bit of a reiteration for me on this answer, but we've got an aggressive plan. It's net zero by 2040. We’re obviously looking at the potential to accelerate part of that plan with Campbell 1 and 2, as part of this plan. But we're also in the broader context of the Biden administration in the 2035 goals. We’ll continue to take a look at what it means for Campbell 3. There is a ton of analysis that needs to go into this. In addition to what I shared earlier, we’re looking at what is the cost of renewables out in the future. We want to feather in those renewables over time, to take advantage of the costs as those costs come down. We want to take a look at storage. Right now, storage is not at the right price. And so how does this storage come in? We need to be careful with that because if we go too fast in this, there's going to be risks from a reliability perspective. The important part of this is making sure that we also not only decarbonize, but we ensure affordability and reliability. I believe we can answer all three. It’s just that we have to pace it and allow technology to develop. So when it comes to the Biden administration, not only with CMS but our industry will be pushing for more R&D and more technology advancements, to be able to meet the aspirations that the new administration is putting out, which frankly we support from a planet perspective. I'll offer Rejji has some thoughts on this too.

Rejji Hayes, Executive Vice President and CFO

Yes. Julien, the only thing I'd add is that there are a couple of old things with respect to the CMS story over time, and they both drive through CE WAY and Garrick, but they still hold true to this day. We plan conservatively and make no big bets. In this plan, we've rolled out, we have not made any major presumptions around what will be in IRP 2.0. So that's not flowing through this 2021 through 2025 plan. In fact, the components as Garrick highlights really, you got just south of $400 million of RPS-related spend that's just still taking through for some of the wind investments that we're making. About $1.5 billion related to IRP, again, just execution on the solar, just add another year. So this is all just incremental blocking and tackling. Again, we do not swing for the fences when it comes to financial planning or regulatory approaches.

Julien Dumoulin-Smith, Analyst

Got excellent. Maybe Rejji, if I can stick with you super quick. Clarify this from your earlier comments and apologies, I misheard. What the order of magnitude or the range that's associated with the residential sales?

Rejji Hayes, Executive Vice President and CFO

We have a sensitivity on slide 18 that illustrates what incremental residential sales would look like. This is presented on an annual basis and it varies slightly each year due to regulatory outcomes. A 1% change based on 2021 data is approximately $0.04 per share annually. We are conservatively assuming we'll return to near pre-pandemic residential levels by mid-year. Therefore, we're projecting a slight year-over-year decline in residential sales as they move back to those pre-pandemic levels. If there happens to be a positive surprise of 1%, that would correspond to around $0.04 per share on an annual basis. Feel free to adjust your modeling assumptions, but that's the general sensitivity.

Julien Dumoulin-Smith, Analyst

Right? Okay. Excellent. So 1% is kind of the order of magnitude and sensitivity.

Rejji Hayes, Executive Vice President and CFO

No, I wouldn't specify an upper limit on where it could go. As we mentioned previously, the trend of mass teleworking is likely not just a temporary change. Many companies have publicly stated, and we’ve also heard informally, that several will maintain some level of mass teleworking in the future. We are taking a conservative approach, so we anticipate the traditional negative correlation where commercial and industrial sectors recover, which may lead to a decrease in residential demand as the workforce adjusts, but it's possible we could see an increase, perhaps 1% or 2%. I don’t want to limit your expectations; I just want to highlight the sensitivity involved.

Julien Dumoulin-Smith, Analyst

Thank you, Garrick. Best of luck, guys.

Rejji Hayes, Executive Vice President and CFO

Thanks.

Operator, Operator

And the next question today comes from Durgesh Chopra with Evercore ISI. Please go ahead.

Durgesh Chopra, Analyst

Hey. Good morning, team. Thanks for taking my question. Maybe just one tactical one real quick. Rejji, just can you clarify? You mentioned some rating agency adjustments to FFO order bet. What exactly are those? And, I mean, I guess, is it the presentation change or what you were trying to convey there?

Rejji Hayes, Executive Vice President and CFO

Yes. Sure, Durgesh. As you know, both Moody's and S&P and Fitch, sorry, not both, but all three rating agencies have tailored computations as it pertains to FFO to debt. For example, now Moody's ascribed to different level of equity credit for hybrids we've been issuing those. S&P adds PPAs as parts of debt, Moody's includes securitization. They all have their sort of bespoke ways in which they calculate FFO to debt. What we're trying to highlight in our current guidance is that we're trying to show those tailored computation so that we can maintain a solid investment-grade credit rating that we've historically targeted. That kind of takes you to a mid-teens level. I think historically, just to keep it simple, we've shown it on an unadjusted basis, which gets you closer to the high teens. We wanted to reflect the reality of what those tailored computations will lead you to. That's what we're effectively doing.

Durgesh Chopra, Analyst

I see. Okay. So it's no change to the absolute forecast number. It just the adjustments, all the credit rating agencies make and you sort of want to show that as relative to the bar? Or sort of the metric that hold you accountable to?

Garrick Rochow, President and CEO

That's exactly right. Our philosophy has not changed at all. We want to maintain solid investment-grade credit ratings, and we think that mid-teens that afforded debt level again, tailored for rating agency should stay there.

Durgesh Chopra, Analyst

Excellent. Okay. Thank you. Then just maybe just a quick one for you, Garrick. And maybe not so quick, but just coming out of the EICO meeting. I didn't get a chance to catch up with you. But just any thoughts that you can share yours or other industry leaders on the legislation front. What could come down from the Biden administration? What might the timeline look like? Just color there would be appreciated.

Garrick Rochow, President and CEO

Yes. Thanks for your question, Durgesh. I had the opportunity to listen to two separate industry events, where John Kerry, who is part of the Biden administration and for the climate envoy, and Gina McCarthy, who is also part of the Biden administration, engaged in the planet ambitions. Our relationship with former Governor Granholm is now likely to be leading at the Department of Energy here shortly. It gives us a good context around some of these emissions. From a net-zero perspective for all sectors by 2050, for the electric sector by 2035, John Kerry was specific to say that it was an all-in approach with these ambitious goals. But again, it was going to be about R&D type development and technology development to move it forward. He also offered the thought that this was not a regulatory approach because that takes too long; it would be incentives-based on the market to spur and increase the market. I believe we're well positioned for that. Again, where we stood at 2040 to 2035, we can do that. But the important piece is making sure we maintain affordability, reliability, and decarbonization. All three of those can be addressed. It’s going to require more R&D from a federal policy perspective. So we can develop the technology that moves at scale to get the economics of it for all our customers. That’s how we’ll lean into this.

Durgesh Chopra, Analyst

Excellent. Thank you. Appreciate the time.

Operator, Operator

And our next question today comes from Andrew Weisel with Scotiabank. Please go ahead.

Andrew Weisel, Analyst

Hey. Thanks. Good morning, everyone. First question on the O&Ms. So the $100 million or so that you identified in 2020 was extremely impressive. Now that the year is closed, how are you thinking about that in terms of sustainability of that $100 million? As a follow-up in the waterfall on page 15, can you just take a little further into the negative $0.27 of higher costs, as far as how much of that is built into the new rates, and how much is what I would call your typical annual CE WAY cost savings?

Rejji Hayes, Executive Vice President and CFO

Yes. From a $100 million challenge in our work, they’re very successful—actually over $100 million, a very successful year, about 50% of that I'd put in the category of sustainable. So let me talk about both buckets. Some of it is just changing the way we do business this year. We're not flying places. We will go back and we’ll do those things right as part of the business. Through the CE WAY, we've done 50% of it is clearly sustainable. There are a number of actions we've taken, which will continue to provide savings for our customers and create headroom as we go forward. I want to give you an example. If I go back to 2015, we still have about 6 million calls in our call center. In 2020, we did 2.7 million calls, dropping 3 million calls over that time period. It's roughly $3 a call. I'll give you one real example of the work and it speaks to the empowerment. What is unique is that we empower our coworkers to do this. Some customers still pay by calling in and dialing in and putting in their credit card information. That team took that process, took 24 steps out of the process, moving it from 405 seconds to 305 seconds. As you can imagine, a customer who wants to pay this way, the more steps they have, the longer it takes, the more they get frustrated, and it turns into a defect that goes over to our call center. That’s just one example of how we've improved the process, made it better for our customers, and made it better for our coworkers. Then the cost falls out of that. That's small, but imagine multiplying that by 8500 people that are doing that type, because they're empowered; that's the unique piece. We're not going to go back and make that experience worse for our customers. Those are the types of cost savings opportunities; I can go through hundreds of them. And in fact, we have delivered on hundreds; they will continue to live on hundreds of them. That's how I think about it. There’s more opportunity across our company to deliver on excellence from the CE WAY. Now to your question, we were very successful in the midst of a pandemic. I think it speaks to our regulatory construct and getting gas settlement in 2020 and electric rate case. As we look for test years and the work underway, we've got recovery in place. When you see that uptick in O&M, much of that is for improved customer service. We increased the forestry work, which is the number one cause of outages. We increased it by $30 million, and so that’s already recovered. We're going forward with that work to improve customer service for all our customers. That's just one example of the increases you noted there. Again, big picture perspective, there's more opportunity. We continue to improve the way we do business, excellent through the CE WAY.

Andrew Weisel, Analyst

Thank you for the update. Given the rising gas prices and the current economic challenges, can you provide insight into how customers are managing their bills? I'm interested in how this season compares to previous ones. Additionally, could you elaborate on the programs you have in place to assist customers in need?

Garrick Rochow, President and CEO

Yes. This has been one of our biggest years in support for our customer. So let me talk about the numbers. Right now, 87% of our customers are in that bucket, in the current 30 days. That compares with 2019, which was 88% in 2017 or 2018, which was 89%. So there is an impact there, but as you see, it's pretty light in terms of historical receivables to 30 days. That's by design. One, we've worked closely with the commissioners to ensure we didn't have a mandatory moratorium on shut-offs. It's been voluntary. We invested a number of dollars in both payment forgiveness and foundation help, specifically $15 million in 2020. We put another $24 million into our foundation, which has also started to provide some of that benefit in 2021. We continue to increase that work. In fact, I was on the phone with the Attorney General's office this week, and we're looking at how we can work together on this issue to do even more in 2021. There are a variety of ways we've helped out those particularly in need during this time. I think there are a lot of bright things occurring both from a COVID perspective and Michigan's economic perspective. One, we got great distribution of the vaccine. If you look at our numbers, the State of Michigan has improved in that performance. We've seen restaurants open. We've seen the movement of kids going back to school, that’s already underway. I take a bigger picture perspective and look at the economic things I've seen in Michigan. I sit on two economic development boards; we've had 126 megawatts of new load, $2.5 billion of investment for 4000 new jobs. This is not just a highlight from this year. If I look back at the last three to four years, it has been very similar. If you go to a place like Kalamazoo, Michigan, where they're manufacturing the Pfizer vaccine, that place is going gangbusters, and all the industries supporting that are going gangbusters. Many people paint us as the automotive state, and we truly have an automotive background, but we're one of the leading states in the growth of life sciences, like we see at Pfizer and other places. Although we're in the midst of a pandemic, we need to be sensitive about those who are low income and are working through that, and we're doing our efforts there. I'm also optimistic about what Michigan offers in the growth that I've seen here over the last four or five years.

Andrew Weisel, Analyst

Alright. That sounds great. If I could squeeze one last on just to confirm. You roll forward the five-year CapEx. But the 10-year plan of $25 billion with three to four upside that's just a reiteration, right? That's not meant to be a roll forward. Am I right? That won't be updated until after the IRP is done in a year and a half or so?

Garrick Rochow, President and CEO

That's correct. It's $25 billion with $3 billion to $4 billion opportunity. If there are events that warrant it, we'll make adjustments.

Travis Miller, Analyst

Thank you. Good morning.

Garrick Rochow, President and CEO

Good morning, Travis.

Travis Miller, Analyst

When you look at the rate case outcome from last year, what are some of the pluses and minuses that you saw in the wins or losses that you might want to address in the next? I know you're not going to need any specifics, but general pluses and minuses that you may want to address next year or this year rather?

Garrick Rochow, President and CEO

One thing I spoke to the forestry outcome, that's going to be a great improvement. Again, the number one cause of outages in our state is tree trimming. A big lift. We've done a lot of great work on electric capital. We made a great case and received a good portion of our electric capital investments that will prepare the grid for the future from a renewable perspective and also improve reliability on the electric grid. We got some good outcomes in distributed generation, and our approach to that which reduces the subsidy that is paid from our customers. Furthermore, we haven't spoken much about electric vehicles, our powerMIFleet, where I think there's a great opportunity in electric vehicles. That’s a space where we received approval. We have a couple of other positives that would offer within there. From an opportunity perspective, we do see this as an opportunity; we can do more work to justify our capital plans, particularly from a facilities and fleet perspective. We’re a little short of our expectations there. That’s an area where we can build out better business cases and get better outcomes. There’s a better opportunity to have our commission not look at historical five-year IT because when IT and what we invest in, when you do a historical look, it doesn't provide the right amount of O&M you need. We have more work we need to do with our staff, with the staff at the MPSC and the commission to make a better case for O&M related to IT investments.

Rejji Hayes, Executive Vice President and CFO

Yes, Travis. The only thing I'd add to Garrick's good comments is that we did see an electric rate case modest degradation in equity thickness. So, when you take into account the deferred tax go-back, it’s only about a 40 basis point of rate making equity thickness reductions. Modest level of degradation. But at the end of the day, we're still now two, three years, beyond tax reform. The balance sheet and cash flow generative effects of tax reform are very real. We'd like to see that equity thickness create some to offset the effects of that. Ideally, we should accumulate some time. We've seen other jurisdictions do that. We'll try to make that case better in subsequent cases.

Paul Patterson, Analyst

Hey, good morning, guys. So some really quick book emptier. On Interbank and I apologize that I missed this. The $0.02 increase in the fourth quarter. Was there anything in particular there that happened?

Rejji Hayes, Executive Vice President and CFO

Yes, Paul, this is Rejji. It’s just kind of the story throughout 2020 of them just executing and delivering. Loan origination volumes are often we saw that basically, after that brief pause for March and April origination slowed down a little bit in the nascent stages of pandemic, but then they just executed and delivered throughout the year. So that’s what's reflected in that $0.02 uptick.

Paul Patterson, Analyst

Okay, great. And then on slide eight. So there's estimated cost savings. I just wanted to touch base on what they sort of represent. I can see with Karn and Campbell, it's adjusted O&M savings. But I'm just not really clear on policies, and I'm just wondering also since securitization of like $126 million, I think that was estimated by the Commission. I wanted to sort of get a sense as to why those aren't being included, if you know what I mean?

Garrick Rochow, President and CEO

Yes. I can take those. So with respect to the PPA-related savings, to give you the quick answer, both Palisades and MCV, when you look at energy and capacity, they’re both priced around $55 to $60 per megawatt-hour. We looked at that relative to replacement costs. For Palisades specifically, that is worth about $90 million run rate per year. MCV is a bit more nuanced. That's more just the fact that the capacity price embedded in the contract steps down, post-2025. It effectively cuts in half, and that’s worth about $50 million. So that's the essence of the savings there for those two. Now, with respect to securitization, I just want to make sure I understand the spirit of where you're going. Is that with respect to when we tried to terminate Palisades early a few years ago, or 126, I just want to make sure what you're referencing there?

Paul Patterson, Analyst

Well, there was a securitization order for about $690 million or something where you guys got in December. I think $126 million was basically what they thought was the savings that they called out as being the savings in it. I guess I’m wondering if it seems like there might be considerably more savings that you guys might be getting from this. I mean, this seems conservative, these coal savings that you're bringing up, and I’m just wondering why you're not calling those out?

Rejji Hayes, Executive Vice President and CFO

With respect to the securitization order in December of about $608 million being specifically related to Karn 1 and 2. What we've enumerated on page eight are the O&M-related savings that we've quantified. There could be additional savings above and beyond that; we have good experiences closing coal facilities. We did the Classic Seven in 2016. Based on our history, that's what we've come up with a $30 million, if there are additional savings within these items enumerated on page eight, we'll realize them when they arrive. We certainly think we can do more. If there are additional savings within these items enumerated on page eight, we'll realize them when they arrive. But again, you know our style—we are very conservative in how we go about our business. We'd rather deliver and surprise to the upside than the downside.

Paul Patterson, Analyst

Awesome. Thanks so much, guys.

Rejji Hayes, Executive Vice President and CFO

Thank you.

Operator, Operator

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn it back over to Garrick Rochow for any final remarks.

Garrick Rochow, President and CEO

Thank you, Rocco. I'd like to thank everyone for joining us today for our year-end earnings call. I'll be back out on a virtual role shortly. I look forward to connecting with you. I'm hoping we can meet face-to-face safely before the year is over. Take care and be safe.

Operator, Operator

Thank you ladies and gentlemen, this concludes today's presentation. You may now disconnect your lines and have a wonderful day.