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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and welcome to the Duke Energy Fourth Quarter Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mike Callahan, Vice President of Investor Relations. Please go ahead.
Thank you, John. Good morning, everyone. Thank you for joining Duke Energy’s fourth quarter 2017 earnings review and business update. Leading our call today is Lynn Good, Chairman, President and CEO; along with Steve Young, Executive Vice President and Chief Financial Officer. Today’s discussion will include forward-looking information and the use of non-GAAP financial measures.
Slide two presents a safe harbor statement, which accompanies our presentation materials. A reconciliation of non-GAAP financial measures can be found on dukeenergy.com and in today’s materials. Please note the appendix for today’s presentation includes supplemental information and additional disclosures.
With that, I’ll turn the call over to Lynn.
Thanks, Mike, and good morning, everyone. Today, we announced adjusted earnings per share of $4.57, closing on a very successful year for our company. We made progress on our strategic investments and delivered earnings at the high-end of our narrowed guidance range, demonstrating flexibility and cost management and largely offsetting the impacts of mild weather. Our workforce pushed forward on our long-term transformation and never lost side of our responsibility to meet the everyday needs of our customers.
We also announced our 2018 adjusted EPS guidance range of $4.55 to $4.85, which includes the impacts of tax reform and planned equity issuances to maintain the strength of our balance sheet. We are reaffirming our 4% to 6% growth rate through 2021 up at the midpoint of our original guidance range in 2017 and extending the growth rate through 2022. Rate base growth from our investments plan coupled with additional rate base from the impact of tax reform will place us within the guidance range by 2019 and at the high, mid to high-end of the range in 2020 and beyond. Steve will provide more context about our financial results, discuss our capital growth plan and share how we are incorporating the impact of tax reform into our planning assumption.
But first, let me spend a moment on Slide 4. The industrial proposition we introduced last year remained adjusted true today. The fundamentals of our business are strong and allow us to deliver growth in earnings and dividends in a low risk, predictable and transparent way. And given the capital intensive nature of our business, the importance of balance sheet strength remains a continued focus for the company. Our attractive dividend yield and demonstrated ability to grow our regulated businesses providing attractive shareholder return for our investors. This positions Duke as a strong long-term infrastructure investment.
Slide 5 underscores our established track record of delivery and our commitment. Overall, 2017 was an exceptional year for Duke Energy. We delivered results, advanced our long-term strategy and excelled in operation. We had solid growth in our Electric and Gas Utilities including the addition of Piedmont Natural Gas. We also refine of the great flexibility offsetting weak weather with cost management. And these results enabled us to deliver strong earnings and increased the dividend by 4%. Our commitment of safety and outstanding operational performance continued in 2017. Our employees delivered outstanding safety metrics with a total incident case rate of 0.36, a 10% improvement on our industry leading performance in 2016.
For the second consecutive year, the combined capacity factor of our nuclear fleet reached record setting levels above 95%. And in the ways of Hurricane Irma our employees return power to more than 1.5 million customers in just over a week.
Last month Fortune magazine named Duke Energy to its 2018 list of the World's Most Admired Companies, a true indication that our stakeholders understand the journey we're onto Duke and the progress we're making.
Finally, we demonstrated progress across our strategic investments program and we worked collaboratively with stakeholders to advance our regulatory modernization initiatives better aligning recovery with our investments. We've seen the benefits of this approach this past year in Florida with the approval of our multiyear rate settlements, including recovery in grid and solar investments in North Carolina with the passage of HB 589 in the addition of rider recovery mechanisms for re-levels.
Turning to Slide 6, we've outlined our 10 year investment priorities consistent with the plan we shared with you in early '17. Our investments were focused on strengthening our energy delivery system by investing $25 billion to create a smarter energy grid, generating cleaner energy by investing $11 billion in natural gas and renewable energy and expanding our natural gas infrastructure doubling the contribution of this segment. We will also continue to engage stakeholders on regulatory modernization and fundamentally change the way we operate to transform the customer experience and achieve top cortile customer satisfaction. As [Indiscernible] told that everything we do are our employees and their dedications operational excellence. We will invest in infrastructure our customers' value and deliver sustainable growth for our investors. Let me walk you through how we plan to maintain our momentum and execute on our strategy in 2018.
Slide 7 provides an update on our efforts to modernize the energy grid. Our objective is to improve system performance in all aspects, customers in trolling convenience, security and service reliability. In 2017, we announced the power forward Carolina's initiative, our 10-year $16 billion plan to modernize our grid in both North and South Carolina. This investment will provide a strong economic stimulus to the Carolinas, creating more than 17,000 jobs and more than $26 billion in economic output over the next decade. To recover this investment, we've proposed a grid rider mechanism in our pending Duke Energy Carolina's North Carolina rate case. We look forward to continuing this conversation at the evidentiary hearing scheduled to begin next week.
In Florida, our multiyear rate plan includes the rate increases to recover our grid modernization investments in the state. Work is already underway. And in October we completed work on our first self-optimizing grid network. This automation enables to grow the software identify problems and reroute power to shorten or even eliminate outages for customers. As we expand this program in 2018, we plan to deploy 100 self-optimizing networks in our service areas. In Indiana and Ohio, we've been recovering $600 million annually through our paying commission and distribution riders, investing in Hardening and Resiliency and other grid improvements. The progress service territories we are also deploying smart meters providing increased convenience choices installed for our customers. With installations with 1.2 meters in 2017, 40% of our customer base now benefits from this technology. We planned to install an additional 1.4 million meters in 2018 and remain on track to fully deploy the program by 2021. And we are leveraging emerging technologies to benefit our customers. We're deploying over 500 electric vehicles charging stations across our Florida footprint, supporting increased demand for the service and a potential source of new load. We're also installing battery storage across many of our jurisdictions with 185 megawatts of projects installed or not. Our greatest footprint projects are essential to create the foundation for a smarter energy future. We will continue to engage with stakeholders to ensure the pace and scale of our investments align with customer needs in each of our jurisdiction and optimize value for our shareholders.
Slide 8 provides an update on the ongoing transformation of our generation fleet. We’ve made significant tries to reduce our environmental footprint and have already lowered our carbon emissions by 31% from 2005. In 2017, we extended our commitment to reduce carbon emissions by 40% by 2030. With more than 11 really dedicated to building more efficient natural gas fired plants and renewable generation, we will continue to diversify our generation portfolio while maintaining competitive rates for our customers. Its part of our assessment of the long-term impact of our changing portfolio, we also announced that we will issue a new climate report in the first quarter of 2018. This report will outline our ongoing commitment to environmental stewardship and sustainable energy production. Advancing our generation strategy the W.S. Lee plant located in South Carolina this year final commissioning and we'll start serving our Carolina's customers soon. Construction progresses on our Citrus County Combined Cycle project in Florida and the Western Carolina's Modernization Project in North Carolina, which are expected to be in service in 2018 and 2019 respectively.
And we are expanding our investment in renewable energy. Our Florida multiyear rate plan allows us to build up to 700 megawatts of new solar generation in the state. Combined with the procurement of almost 2,700 megawatts solar in North Carolina under HB 589, we are clearly making progress on our carbon reduction goal. Furthermore, these regulatory and legislative achievements in Florida and North Carolina reflect modern mechanism to recover these investments, demonstrating the success of our stakeholder engagement efforts.
Finally our nuclear dealers are fundamental to provide a carbon-free generation to our more than 4 million Carolinas customers. These units represent the largest regulated nuclear fleet in the country and are essential to our long term carbon reduction goal. As we look ahead, we are evaluating license extension for these facilities for an additional 20 years to continue serving customers with the reliable service they expect.
Moving to Slide 9, let me update you on our national gas business. October marks the one year anniversary of the Piedmont Natural Gas acquisition and we're seeing the positive results of this transaction. Natural gas will play a major role in the cleaner energy future and we are leveraging the overlap between our electric and gas businesses to better serve our customers. We have added Marshall Steam Station to our list of dual-fuel projects in North Carolina. Our three dual-fuel projects announced in the last year represent a $500 million investment for both Duke Energy Carolinas and Piedmont and demonstrate the complementary nature of our franchises and advantages of joint planet. We will use coal-firing of coal and natural gas at Rogers, Belews Creek and Marshall to reduce our carbon emissions and increase our flexibility to manage costs providing savings to customers.
We've reached important milestones for our midstream gas business. We recently completed Sabal Trail pipeline and the Atlantic Coast pipeline are critical infrastructure investments that will bring much needed gas supplies to the Southeast as well as economic growth in rural areas of the region. During a record cold weather in early January or heavy demand hit homes, hospitals and industrial buildings caused natural gas prices to soar due to gas transportation constraints in North Carolina. This provides a clear reminder of an ACP work is an important source of natural gas for our region and will help provide significant savings for customers.
We’re pleased to see work has started on ACP under limited notices to proceed from FERC beginning construction activates in permitted areas. After more than three years of comprehensive studies, North Carolina's Department of Environmental Quality issued key permits for the pipeline in late-January. These approvals along with permits receive from the Army Corps of Engineers brings us several steps closer to beginning full construction of this pipeline and we are way to receive of the final permits from Virginia. It has been a river of constraints in transparent permitting process for this 600 mile pipeline. And we continue to target an end service state of late 2019.
Future delays and more stringent conditions of the permitting process, ACP now estimate total project costs between $6 billion and $6.5 billion. As a reminder, Duke's share in these costs is 47%.
I’m going to close by saying that we have a clear view of the passage at Duke Energy. With our customers at the center of everything we do, we’re transforming our company, while providing reliable safe and affordable energy. Stakeholders depend on us to deliver on our commitment and we did adjust that for 2017. From financial results to operational excellence, we created value for our customers to shareholders and this focus will continue into 2018 and beyond.
Now, I’ll turn the call over to Steve.
Thanks, Lynn. As mentioned, we had a solid year delivered on our financial conditions. As you can see on Slide 10, we achieved adjusted earnings per share of $4.57, which was near the high-end of our narrowed guidance range. We are already seeing the benefits of our portfolio of transition with the focus on stable, predicable and regulated businesses. We grew our electric utilities through higher pricing in riders, organic loan growth and ongoing investments across our jurisdictions. Our gas segment also demonstrated growth, driven by Piedmont's contribution and additional earnings from our midstream pipelines. Additionally we achieve our cost management targets, which offset the majority of the below-normal weather we experienced during the year. Overall, we are pleased with the growth across our businesses.
Turning to Slide 11, let me walk you through key implications of the new federal tax law. As you know, the tax reform has been a key focus for the utility industry. We were successful in advocating for industry's specific provisions that will benefit both customers and shareholders. As the holding company, the lower income tax rate will reduce the tax yield on interest expense resulting in lower earnings beginning in 2018. At the utilities, tax reform results in lower accrued tax expense, which provides opportunities for lowering rates to customers. However, because Duke Energy is not a significant cash tax payer, any reduction to customer rates will place downward pressure on our consolidated cash flows. Recall, we’ve been in the net operating loss position for tax purposes for the last few years due to bonus depreciation. We currently estimate we will be out of the NOL in 2019 and begin using our accumulated tax credits through the balance of the five year plan. In response to these issues state regulators have initiated dockets in our jurisdictions. In general, we are recommending to use the lower tax rates to reduce customer rates in the near-term as well as help offset future rate increases. We have made several proposals including accelerated depreciation, recovering investments more quickly or amortizing regulatory assets. This would allow us to recover certain costs and maintain utility credit quality while avoiding volatility in customer rates. In Florida, the commission has already approved using the benefits from tax reforms to offset the increase in customer rates with Hurricane Irma restoration and to accelerate depreciation of certain closings. Overall, we expect customers to see savings overtime, which will vary based on the regulatory outcomes in each state.
Tax reform also provides some benefits to cash flow. Due to the treatment of our alternative minimum tax spreads, the new law provides for a full refund with AMC credits over the 2018 to 2021 tax use. As of December 31, we had approximately 1.2 billion of credits subject to this refund. Another major impact of tax reform is to increase the utility rate base. This occurs as the lower tax rate and elimination of bonus depreciation resulting lower deferred taxes, which, in turn, increases rate base. As a result, we will see higher rate base growth for the same level of capital spend resulting in an increase in the company's earnings power. Given that the positive drivers will take some time to manifest, we are taking steps to further strengthen our balance sheet and fund our capital program. In 2018, we intend to issue $2 billion of equity including our original expectation for $350 million of equity via the drill. We also have reduced our five year capital plan by approximately $1 billion. I'll share more details about the capital and financing plans in a moment.
On Slide 12, we have outlined more detail about the earnings impacts of tax reform. This morning, we announced our 2018 adjusted EPS guidance range of $4.55 to $4.85 per share. Earnings for 2018 will be driven by ongoing investment programs across our jurisdictions, low growth expectations and the continuation of our regulatory recovery activities. We have best of the lower corporate tax rate being resolution from plant equity issuances we'll partially offset this organic growth. With this in mind the midpoint of our 2018 guidance range is slightly below the 4% to 6% earnings per share growth rate, we introduced last year. However, we expect to be within the range by 2019 and at the mid-to-high end of the range in 2020 and beyond given that the rate base will now grow at a faster pace.
Turning to Slide 13, our growth will be supported by our five-year $37 billion growth capital plan. Our investments aligned with our strategies to modernize the energy grid, generate cleaner energy and expand natural gas infrastructure. In light of cash reform, we have lowered our total capital over the five year plan by about $1 billion. We have expanded our cost management capability and applied this to capital. Furthermore, we are optimizing our operational capital around regulatory activities in the land. We have modestly increased our level of investment in commercial intervals. And we look to utilize tax equity partners to continue invest in solar and wind projects. The total capital plan is lower than originally outlined in 2017. Tax reform has approximately $3.5 billion to rate base by 2021. Earnings base now grows to the 7% CAGR through this timeframe, representing a 1% increase compared to what we presented last year. The new tax law will also provide additional headroom in customer bills allowing us to continue making smart investments, while also keeping rates as low as possible. Overall, we are taking a balanced approach and we are confident we will continue to meet the needs of customers and investors.
Moving to Slide 14, let me walk you through our 2018 financing plan. We are committed to maintain the strength of the balance sheet as we look to finance our expensive capital plan over the forecasted year. As I mentioned earlier, in 2018, we plan to issue $2 billion in equity including the $350 million we already expected to issue to the DRIP. We plan to raise this equity to a discrete transaction within the next few months and by selling shares under our recently filed ATM broker. We may utilize the forward structure to better align proceeds from the equity offerings with the timing of our actual cash needs. This will help to avoid unnecessary share dilution in 2018. We will be opportunistic in completing our incremental equity needs with the goal of completing it by the end of the year.
Going forward, we still expect to issue $350 million of equity per year to a combination of our DRIP/ATM programs. We continue to be discipline with our approach to capital reducing the level of investment versus a year ago. Additionally, we will maintain our focus on cost control, which I will discuss in more detail in a moment. All of these actions will improve our credit metrics over the five-year plan. Our balance sheet will be supported by the equity issuances and planned regulatory activity, which in turn -- which will turn our investments into cash returns more equity. By 2020, we expect our FFO to debt ratio to be in the range of 15% to 16% and our Holdco to debt percentage to be in the low-30s both aligning with our targets. We believe the combination of the 2018 and the ongoing annual equity issuances, satisfies all of our equity needs and provides the balance sheet strength to execute on our business plan.
Turning to Slide 15, our attractive service territories for constructive regulatory frameworks and our cost management efforts have allowed us to earn at or near or allowed ROEs. We’re seeing strengthened customer growth across our jurisdictions, particularly in the Southeast, and expect this to continue. This trend supports growth in our electric and gas utilities. We continue to plan the 0.5% annual retail loan growth in our electric utilities in 2017, weather normalized retail loan growth is 0.4% equivalent to 0.7% when excluding the impacts of the lead day in the prior year. This tracks with our planning assumptions. Several macroeconomic indicators support our loan growth projections. Overall, the U.S. economy is strengthened and leading indicators point to continued expansion for the commercial and industrial segments. In addition, the U.S. dollar continues to support domestic manufacturing. And optimism for retail and small businesses is near all-time high. Furthermore, key objective of the new tax laws to stimulate business investments, create jobs and grow the economy. At this time, we’re not incorporated effects from tax reform in our volume growth planning assumption, but expect it could be an upside to our forecast. We are also managing our cost structure using new technology and rolling out data analytics to extend our commitment to keep non recoverable O&M flat through 2022. The use of mobile applications is bolstering productivity and we are keenly focused on identifying efficiencies throughout operational and corporate structures. As we look to the future, we are developing our digital capabilities to faster and connected culture. Due to modernization, of course, customer systems and grid infrastructure, we will see tangible benefits in savings. 2017 was a busy regulatory year for us.
Slide 16 outlines our projected activity over the planning horizon to achieve timely recovery of our investments. We have a robust capital plan that involves substantial investment in electric and gas infrastructure over the next five years, and we have modern regulatory recovery mechanisms in place for many of these investments. In Florida, we have the multiyear rate agreement through 2021. In Ohio and Indiana, we have riders to recover transmission and distribution investments and are requesting extension of the distribution rider in Ohio. In North Carolina, we now have renewable riders established to HB 589. And at Piedmont, we have distribution infrastructure riders. We will continue to pursue these types of recovery mechanisms to enhance our investment returns.
Let me take a moment to discuss our pending base rate cases in North Carolina. We expect an order in the Duke Energy progress takes any day and no later than March 1. New rates will be effective soon after the orders issued. Our Duke Energy Carolinas rates cases progress with the evidentiary hearing schedule to begin on February 27 with requested rates to be effective May 1 in that case, if approved by the commission.
Shifting to Slide 17, we understand the value of the dividend to our shareholders and are dedicated to growing it responsibly. 2018 marks the 92nd consecutive year paying the quarterly cash dividend, demonstrating the stead fast commitment to our investments. We expect to maintain our annual dividend growth rate of approximately 4% to 6% though 2022, consistent with our long-term earnings growth as we target our payout ratio in the 70% to 75% range. Given the near term impacts of tax reform, we expect the payout ratio will be higher than the targeted range initially. Therefore dividend growth will be closer to the low end of the guidance range for next couple of years as we work the payout ratio backed in. The growth rate will increase as we are more solidly positioned in the payout ratio range.
Before we open it up to questions, let me turn to Slide 18. Our history of operational excellence coupled with the strategic plan that is already producing compelling results, gives us confidence as we continue to offer a solid long-term investment opportunity. Our track of dividend yield combined with earnings growth from investments in our regulatory utilities provides a strong risk adjusted return for our shareholders. We are positioned to deliver results for both customers and shareholders and are confident in the plan we have for 2018 and beyond.
With that, we'll open the line for your questions.
[Operator instructions] And we will take our first question from Shar Pourreza with Guggenheim Partners.
Good morning, guys.
Good morning, Pourreza.
Just a quick modeling question. Can you elaborate a little bit on the drivers of growth from '18 to '19, Steve. I mean, to take you back within that previous 4% to 6% range by '19. You sort of would need a lot of growth year-over-year almost 8% just using the midpoint of the 2018 guide. I know it's not linear, but are we thinking about this step-up in earnings correctly? Should we think more bottom end in '19? Just remind us how you are closing that gap?
Well, let me discuss some of the drivers here for 2019, and that really pretty similar to the drivers that we have in our businesses each year. We've got rate riders and rate cases that take into play. We've got our normal volumes growth, which has been pretty strong as well. And then there is AFUDC on various investments. When you look at 2019, it will have the full-year impact of the Carolinas rate cases, and then in 2019, we expect to see accelerated spending in Atlantic Coast Pipeline. Of those will be a couple of big drivers towards the earnings that you might see in that particular year, Shar.
Okay, that's helpful. And then just we'll take on ACP, it's good that it's moving sort of the head here. But at what point sort of in the construction cycle should we think about incremental growth opportunities? Is it sort of post to state approvals or where the later part of the construction phase? Like how are you thinking about the next leg of growth with ACP 2 and 3?
Shar, thanks for that question. We are proud of the progress that we've made over the last couple of months with state and federal permits. And our focus is ramping up construction to hit a late 2019 in service aid. I think about additional investment opportunities in Chile, there is expansion of ACP, which would occur in the form of compression, a very cost effective way to add capacity, and then extension would be another opportunity. I think, at this point, our focus is on building the initial project as it's establish, we'll then our attention to expansion -- compression expansion, really driven by needs of our customers and then following that, we'll look at opportunities to expand.
Got it. That's helpful. And then just, Lynn, one strategic question, Duke falls in and at of M&A charter, especially, recently with some of the jurisdictions that you've been active in, which is Indiana and the Carolinas, can you just sort of refresh your thoughts on how you are thinking about additional growth through inorganic opportunities in light of kind of what you are seeing as far as tax reform, and sort of maybe even the stress on sort of the balance sheet?
A - Lynn Good
Our focus, Shar, is on organic growth at this point. We feel like we've got a very robust set of investments within our jurisdictions and very attractive jurisdictions that give us an opportunity to deliver benefits to customers and investors. With the steps we've taken around the balance sheet, the equity issuance that also positions us to support that organic growth. And so M&A is not a part of our strategic plan to achieve what we've laid out before you. We look at that as opportunistic, but we're really comfortable with the organic plan we have set forth.
Excellent. Thanks so much. I'll jump back in the queue.
Thank you.
We'll take our next question from Stephen Byrd with Morgan Stanley.
Hi, good morning.
Good morning, Steve.
Good morning.
I just want to touch on what you've mentioned in terms of further growth in Renewables and the Commercial segment. Just at a high level, I'm curious your thoughts on the competitive environments for Renewables, the degree of growth potential there. What are you seeing out there on the competitive playing field for that business?
Steven, I think, the business is a competitive business. I think there is some adjusting as a result of the tariffs that have recently been imposed. We'd like to see how that landscape plays out. We also are pacing the lower tax rate. We have to determine how capped equity markets perform, although we still expect them to be there. So we believe, we have a very solid business, a business of scale, we believe we're capable of competing. So we have also been appropriately conservative with our assumptions around returns and are not going to chase it unless it’s delivering a return above our cost of capital. And that will be our approach as we go forward. I would point to regulate renewables as well, so we’ve got 700 megawatts from building within Florida. HB 589 in North Carolina represents an opportunity for either our commercial regulated business among we working closely those opportunities as well.
That's helpful. And thank you. And then just thinking high level around Amazon and the potential for them to put HQ number two in your service territory, without any too specific, I’m just curious, you’re thinking at a high level as to what will be required to accommodate what kind of incremental capital or operational changes you need to make to accommodate that?
So Steven, I think, we’re capable of serving Amazon today with a really robust system in North Carolinas. We have pleasure to serve and expanding facility in Northern Kentucky that we’re working closely with them on. The triangle area around that has been an important growth area for the company for some time. So we’ll be anxious to put infrastructure in place with additional infrastructure is needed. And I think about our approach to economic development in general, we’ve been very aggressive in our service territories making investments to attract businesses. And that will be our approach here as well if we get that opportunity for the Carolinas.
Thank you so much. If I could just maybe one more on changes to the grid. You’ve been spending a lot of time and effort thinking about grid modernization in a number of ways. I’m just curious, as you see it now; do you see incremental investment opportunities from grid modernization over and above which you’ve already laid out? Or is that likely to be a relatively long evolution in terms of changes to be making there?
I believe we have a robust plan season where we have been disciplined in establishing business cases for each of these investments, to deliver benefits to customers whether it’s regular customer experience whether it’s reliability metrics. We do have the ability to change the timing, accelerate, slowdown depending upon the needs of customer needs in the jurisdictions. And I would expect as the system continues to grow, which we would see it doing over the next 10 years. The Southeast is attracting an incredible number of new citizens. People migrating to this area that will find continued opportunities to expand our system. So we have a team of people focusing on modernization as a full time assignment to ensure that we’re growing the infrastructure that our safe count on, same for Indiana, same for Florida, same for Ohio.
Okay. Thank you very much.
Thank you.
Thank you.
We will take our next question from Michael Weinstein with Credit Suisse.
To what extent do you see the increase in earnings growth into 2019-2020 period has driven by the rate base increases coming from differed tax amortization? In terms of -- does that give you increased confidence in that ability to get back up to the mid high range, because this portion of the rate base growth is -- its not -- its uncertainty right?
Yes. And you know, Michael, I think, you can see the front end impact with the loss of interest shield and resolution. But as you look into our acquired debt -- looking at rate base growth, you can see $2.5 billion to $3.5 billion of rate base over that period. And that's about spending at all of capital. So if that rate base grows in the fundamental business that we operate, low risk high quality jurisdictions to give us confidence that need to maintain the 4% to 6% growth rate really actually [indiscernible] to tax reform in '18, get back within the range in '19, mid to high in '20 and beyond. So the point that you are making around the strength of the rate base curve is exactly right.
Great. And also maybe you could just comment a little bit about the tax equity market around Renewables after the big provisions in the tax reform package?
We believe we'll be successful in that market with our -- size of our company sale and credit profile. I think all of this is something that we'll continue to monitor. We’re actually in the tax equity market right now with the projects and are seeing success and putting that together. So we are optimistic.
Are you seeing any additional opportunities, maybe coming your way as a result of smaller players as you are having a harder time gaining access to that market now?
Michael, there is a lot of opportunity flow that come through and compliments to the team to proceed to -- as they approach in a disciplined fashion to identify projects that makes sense for us, but we do see good opportunity flow.
Thank you very much.
Thank you.
Thank you.
And we will take our next question from Jonathan Arnold with Deutsche Bank.
Good morning, guys.
Hi, Jonathan.
Good morning.
When you talked about what you have assumed for the cash treatment of tax reform with regard to customer rates, it sounded like you were saying you've assumed you'll flow it back reasonably quickly, but then you talked several things during which would do the opposite. So is there any way you can give us a sort of a high level what's assumed in this FFO target versus the range of potential outcomes?
Yes, Jonathan, we've looked at a number of outcomes and they may very per jurisdictions, certainly, we have a constructed outcome in Florida. In general, what we are thinking about here is that the impact of the rate decrease from the 35 to 21 will work that back through perspective rates and give that aspect to customers. We're looking at the excess differed tax piece; the protected piece will go back slowly. And we’re looking at utilizing the other excess differed taxes to be used as a mid against the rate base increases that are coming as well to help reduce the volatility. That’s a general way to think about the way we've incorporated this into our plans.
So, for example, where you have rate cases pending at that point of 35 to 21 would be part of that case, and in other jurisdictions, it would be later, is that right?
Jonathan, I think, I'll try graph at Carolinas as Steve will trying here too. We not expecting the tax reform will be a part of the DEP case that we are expecting an order on anytime. There is a separate docket this tradition has established. Testimony will be presented in the DEC case around tax reform. And I think it's really an open question on whether or not itself within this case or in a separate docket. But I think in all events, there is an opportunity here to use tax reform, there was an impact of rising prices or investments in the state. The other state, some of them will go automatically in the place for your riders, so in Indiana and Ohio where there is a rider tracking mechanism, those tax reform impacts will go to meaningfully t-mark would be another example of that. And then we'll tailor other jurisdictions based on general rate case timing or separate dockets are established and fee settle will be really customized jurisdiction by jurisdiction.
And can you jus touch on ACP in that context?
The ACP project is benefitted by tax reform. Again, we've got several grades with our customers on ACP. And if this -- it's not a formula type rate there. And so that will be one of the things that benefits us more with the quotation to ACP.
And you may remember it's -- just one point on that. ACP was a competitive process early on with negotiated range that came out of the competitive bidding process. And ACP was selected as the most cost effective solution and continues to be the most cost effective solution for customers.
To see that anticipate an adjustment there?
That's correct.
Great. Thank you. And then could I just on -- just when I look at the FFO to debt, slide you show '18 then you showed '20 to '22, does that -- should we assume like '19 is sort of part of a bridge to that new number? Or does it go down a little of that improve? What's the sort of '19 profile as you fill in that gap?
We will be improving on our metrics throughout the plan, Jonathan. I don’t want to give you year-by-year guidance, but we do see an improvement throughout the plan.
It trends up from 2018, Jonathan.
And have you had the opportunity to sort of download with the agencies on how the plan looks, now you've framed out some -- your equity piece?
Yes, we visited with all three of the agencies, Jonathan, in advance sharing with them our perspective, the actions we've taken not only the equity, but the reduction in capital, our focus on cost management, the demonstrating track record and pursuing regulatory recoveries. And we've had a very comprehensive discussion, we believe, we put forward incredible plan to the agencies that support our ratings. Of course, they will deliberate and put the guide of the coming months, but we feel like we've had a very good discussion of very incredible plan like this.
Great. Thank you. And if I may digest the '18 you have 15% to 16% targeted effective tax rate. Is that the right bolt-on going beyond '18? Or is it still low -- is that lower than you think it will be?
I think that's certainly what we see for '18. We typically don’t project beyond that. I don’t know that it's going to bare a lot from that as we go forward with them.
Thank you, Steve. Thank you, Lynn.
Thank you.
Sure.
We’ll take our next question from Julien Dumoulin-Smith from Bank of America Merrill Lynch.
Good morning, Julien.
I just wanted to follow-up and clean up a few items from past questions here. First, on the growth into ’19 and then ’20 beyond, just to make sure if I heard you right, mid to high-end in ‘20 and beyond. Is the right way to think about this that basically you’re targeting a 7% rate base growth off of 2018 such as that get you to close-ish to 2019, the midpoint of that the range, as, I think, Shar initially asked. And then, again, as you roll forward take 7% net out a small amount of equity dilution and then again that’s how you outperform the 4% to 6% from ’19 into ’20. Just want to make sure we’re hearing the puts and takes appropriately here.
So, Julien, I would think about 2019 is being within the range, within the guidance range. I think the lower end of the guidance range would be the way to think about ’19 as we’re still getting into get that recovery of the increased rate base investment, because you think about ’19 earnings is going to have to be rate case is prosecuted in ’18 or certain of those jurisdictions. We will see the rider impact and other things. But within guidance, that’s the way, I think about ’19, and then by ’20 mid to high, because we have an opportunity or another year of securing that revenue stream building on that rate base growth. And so $3.5 billion of additional rate base growth without spending and additional dollar of capital, and these jurisdictions, we believe underpins our ability to get in that range by 2020, mid to high.
Great. Excellent. And then coming back to prior question on the Commercial side of the business, specifically Renewables, can you elaborate a little bit on what’s driving. I think in the commentary you suggested that you would actually increase the size of investment, but then, perhaps, in some of the Q&A, if I hear you right a little bit more cautionary on tariffs et cetera, are you looking to expand this or is this really a statement around HB 589 and the opportunities there? Is this something beyond the Carolinas here that you guys are really seeing out there?
Julien, there is about $1 billion of investment in Commercial and Renewables last year. It is modestly higher than that this year. We have introduced half equity for the first time, you may recall. Before tax reform, we thought we will be a tax payer and someone who could use credit sooner than what’s going to happen. And so we have looked at that business in the -- through the lens of tax equity. We do see opportunities from HB 589. And as we just clamp the implications of HB 589, we put that capital in the Commercial business for planning assumption. So I think our message here has been consistent. We liked the business; we have scale in the business. We believe we can invest in a manner that’s profitable for our investors. And the modest increase in capital is HB 589 and other market opportunities.
Got it. Excellent. And just last nitpicking on the FFO to debt question real quickly, the 2018 number you show. Is that inclusive of the equity or should we be thinking about the jump, the ratable improvement from 14% up to the 15% to 16% range, the equity being a big chunk of that improvement. Just want to make sure what level of debt here?
The equity is in the FFO…
Yes. The equity…
Is reflected in that 14% already?
Yes.
Yes. That’s true.
Again, Julien, I think, as you know, an equity issuance impact is denominator, right. So it's going to have an impact on FFO, but it has more dramatic impact on our holding company debt, which, of course, will be declining over the five year period, so roughly, its 71%, so more aggressively than what we shared with you last year. The engine for production of FFO is our regulatory businesses and that is not changed in tax reform. So we will go after investment and delivering returns in a way that we historically have by delivering returns in regulated profits and that’s the engine that drive the FFO growth over the period.
That’s right. And our ability to execute in our cost management has helped us to exceed the original estimates we have for 2018 in our credit metrics.
Right. Excellent. Thank you.
Okay. Thanks, Julien.
We will take our next question from David Paz with Wolfe Research.
Hi, David.
Good morning. Just going back to the growth question, so looking on slide 12, when you say mid to high end of the growth target in 2020, is that the growth over 2019 earnings or is that a compounded average annual rate of the midpoint of your 2017 guidance?
It's all for '17, David.
Okay. Great. Thank you.
Thank you.
We take our next question from Michael Lapides with Goldman Sachs.
Hi, guys, more of a longer term question. How are you thinking about the jurisdictions where you have the most lag? What you can do to structurally change that to reduce that lag outside of just kind of continuing the bio cases on a pretty frequent basis?
Hi, Michael, I appreciate that question because we have drawn our attention to what we are calling regulatory modernization, which is trying to look at the regulatory mechanisms and match those mechanisms to the way investment occurs. So Indiana, Ohio, multiyear rate plans in Florida, all of those are very well seasoned to work with the type of investments that we're making in the grid and renewable, clean energy et cetera. The Carolinas is where we have a little bit of work to do. We're pleased with the result of HB 589, which puts trackers in place for renewable and for a proof of contract both of which were important. And we as you may recall have also filed for a tracker of around grid investment in our DEC case. Our intent is to follow on a dual path as we did with HB 589. And the commission, how far they believe they can go and then pursue legislation if need to finalize that work. I believe it’s a win-win; the type of investments that we're making will deliver immediate customer benefits. It minimizes the impact on price to customers. And I believe with tax reform is another tool we should be able to find our way that something works for customers and for the investments we are trying to put in the place. So the focus of modernization is throughout all the jurisdictions, but we have some specific objectives we are trying to achieve in the Carolinas.
Got it. And when you are looking at the Carolinas, how - what's in the feedback in the rate cases regarding the grid modernization tracker?
So publics have produced some testimony. They have some questions about what is modernization really question the type of investments. They like some of them better than others. We believe that there is a strong case throughout the program around modernization, but they also introduced the notion of the cap if the commission board will approve the tracker. So I believe there was a good start to a conversation that we will continue as part of this case.
Got it. Thank you, Lynn. Much appreciated.
Thank you.
Will go next to Praful Mehta with Citi.
So I guess just bringing together both the groups trajectory that you've talked about here and the credit that you've laid out. Wanted to understand how tax reform and the discussion with the regulators fit in because you've kind of highlighted discussion around regulatory asset recovery, accelerated depreciation. So if any of those variables change and the discussions with regulators are, I guess, better than expected or worse than expected. Which variable should we look at that can impact either your earnings trajectory or your credit are putting more pressure on the balance sheet? How should we track that?
Praful, I'll get a start and turn it over to Steve. He and his team have worked extensively on the implications of tax reform really dating back into 2017. But you can appreciate anytime you put a five year plan together. You're putting it together with a range of assumptions and that's the case here as well. We won't have complete sure to be on the way the commissions are going to address tax reform until later into 2018. But as Steve indicated, we are assuming pretty current return or reduction in rates around the tax rate of 35% to 21%. And so I think that's the reasonable assumption that should play out in '18 and beyond in each jurisdiction. And then on the accumulated differed taxes, the protected ones go back overlay consistent with normalization way. And we are proposing that the unprotected differs go back over a rate we'll hear at times. And some of our jurisdictions are those differed taxes are actually related to property. So a longer period of time makes sense to us that, of course, will be subject to negotiation. And we will check and adjust, and we always do it depending on how that plays out, but believe we have reasonable planning assumptions. Steve?
Right, I think, Lynn covered it very clearly there that's kind of how we look at it. I think that makes sense. This is an opportunity to reduce customer rates pretty quickly, but we also have an opportunity to here to utilize some of this, to offset some of the rate base increases that are coming, and we will be looking at excess differs as a tool for that. And that was what was done in Florida, I think, a very constructive settlement there. So we will see how it plays out on the other jurisdictions.
So how big is the unprotected piece that needs to be refunded? And what assumption is being need on the timing of that refund?
Unprotected differed taxes are about -- for the total corporation about $1.8 billion, protected are about $4.5 billion.
I got you. And the assumption on the return of the unprotected, I'm assuming is quicker, obviously, because it's not the average life of asset. You have some unprotected foundries that are connected with any. But for the rest, is there -- is it like a five year period just to get a sense of what kind of timeframes just that refinance to take place in?
Praful, I would just say a reasonable timeframe at this point. We're early in the process of this discussion with our jurisdictions, and it's going to be jurisdiction by jurisdiction. As I said a moment ago, some of the riders' mechanisms will be treated differently in the general basis rate case. So as we've learned more in these dockets that are opened in front of the jurisdictions will be prepared to share more specifics on that, but believe that we put together a plan here with the reasonable set of outcome.
Understood. Fair enough. And just quickly just last point on the holding company debt. It’s going from 31% to 32%, I guess, in the 2020-2022 timeframe. That percentage, is that being achieved because the underlying denominator that is the total debt of the company is growing? Or is that being achieved because the holding company debt has been paid down during that timeframe?
It’s really reflecting the benefit of the equity issuance, Praful. So we are delevering the holding company with the equity issuance.
I got you. So apart from the initial pay down, there isn’t anything incremental happening post the ’18 timeframe in terms of delevering at the Holdco?
So there is a modest trending up ACP and other things and then down again. So that's the starting point in ’18 and the ending point are flat.
I got you. So I’m just trying to confirm that post ’19, is there any assumption of debt paydown at the Holdco or no?
Relatively flat end-to-end. We can probably take you through financing schedules after the call, Praful, if there is more detail that we can help you with.
Understood. That's super helpful. Thank you very much.
All right. Thank you.
At this time, I’d like to turn the conference back over to Lynn Good, for any additional or closing remarks.
Great. Thank you. Thanks everyone for joining us today. We’ll be available by phone and have an opportunity to meet with many of you over the next couple of weeks. I want to extend my thanks to the team who has put all this together with tax reform coming late in the year. It’s been an all out effort. And we’re really delighting to put it forward today. Thank you for your investments in Duke Energy.
And that concludes today’s call. Thank you for your participation. You may now disconnect.