Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Duke Energy Corporation (NYSE:DUK)
Q4 2017 Earnings Conference Call
Feb. 20, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please stand by. We are about to begin. Good day and welcome to the Duke Energy Fourth Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Callahan, Vice President, Investor Relations. Please go ahead.

Michael Callahan -- Vice President, Investor Relations

Thank you, John. Good morning, everyone, and thank you for joining Duke Energy's Fourth Quarter 2017 Earnings Review and Business Update. On 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 2 presents the safe harbor statement which accompanies our presentation material. A reconciliation of non-GAAP financial measures can be found on www.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.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Thanks, Mike, and good morning, everyone. Today we announced adjusted earnings per share of $4.57, closing out 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 in cost management and largely offsetting the impact of mild weather. Our workforce pushed forward on our long-term transformation and never lost sight 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 impact 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 off of the midpoint of our original guidance range in 2017 and extending the growth rate through 2022. Rate-based growth from our investment plans, coupled with additional rate base from the impact of tax reform, will place us within the guidance range by 2019 and at the 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 impacts of tax reform into our planning assumptions.

But first let me spend a moment on Slide 4. The investor proposition we introduced last year remains just as 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 business provide an attractive shareholder return for our investors. This positions Duke as a strong, long-term infrastructure investment.

Slide 5 underscores our established track record of delivering on our commitment. Overall, 2017 was an exceptional year for Duke Energy. We delivered results, advanced our long-term strategy, and excelled in operations. We had solid growth in our Electric and Gas utilities, including the addition of Piedmont Natural Gas. We also responded with great flexibility, offsetting weak weather with cost management, and these results enabled us to deliver strong earnings and increase the dividend by 4%.

Our commitment to 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 wake of Hurricane Irma, our employees restored 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 on at Duke and the progress we're making.

Finally, we demonstrated progress across our strategic investment program and we worked collaboratively with stakeholders to advance our regulatory modernization initiative, better aligning recovery with our investment. We've seen the benefits of this approach this past year in Florida with the approval of our multi-year rate settlement, including recovery in grid and solar investments in North Carolina, with the passage of H.B. 589 and the addition of rider recovery mechanisms for renewables.

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 will focus on strengthening our energy delivery systems 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 quartile customer satisfaction. And foundational to everything we do are our employees and their dedication to operational excellence. We will invest in infrastructure our customers value and deliver stable 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: customer control and convenience, security, and service reliability. In 2017, we announced the Power/Forward Carolinas 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 North Carolina rate case. We look forward to continuing this conversation at the evidentiary hearing scheduled to begin next week.

In Florida, our multi-year rate plan includes rate increases to recover our grid modernization investments in the state. Work is already under way and in October, we completed work on our first self-optimizing grid network. This automation enables the grid to self-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 transmission and distribution riders, investing in hardening and resiliency and other grid improvements.

Across our service territories, we are also deploying smart meters, providing increased convenience, choice, and control for our customers. With installations of 1.2 million meters in 2017, 40% of our customer base now benefits from this technology. We plan 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 vehicle charging stations across our Florida footprint, supporting increased demand for this service and a potential source of new loads. We're also installing battery storage across many of our jurisdictions, with a 185 megawatts of projects installed or announced.

Our improvement 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 jurisdictions and optimize value for our shareholders.

Slide 8 provides an update on the ongoing transformation of our generation fleet. We've made significant strides 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 billion 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. As 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, is near final commissioning and will start serving our Carolinas customers soon. Construction progresses on our Citrus County Combined Cycle Project in Florida and the Western Carolinas 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 multi-year 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 of solar in North Carolina under H.B. 589, we are clearly making progress on our carbon reduction goal. Furthermore, these regulatory and legislative achievements in Florida and North Carolina reflect modern mechanisms to recover these investments, demonstrating the success of our stakeholder engagement efforts.

Finally, our nuclear units are fundamental to providing 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're evaluating license extensions 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 natural gas business. October marked 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 a 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 over the last year represent a $500 million investment for both Duke Energy Carolinas and Piedmont and demonstrate the complementary nature of our franchises and the advantages of joint planning. We will use co-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. The 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 the record cold weather in early January, heavy demand to heat homes, hospitals, and industrial buildings caused natural gas prices to soar due to gas transportation constraints in North Carolina. This provides a clear reminder that ACP will serve as an important source of natural gas for our region and will help provide significant savings for customers.

We are pleased to see work has started on ACP under limited notices to proceed from FERC, beginning construction activities 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 received from the Army Corps of Engineers, brings us several steps closer to beginning full construction of this pipeline and we await receipt of the final permits from Virginia. It has been a rigorous and transparent permitting process for this 600-mile pipeline and we continue to target an in-service date of late 2019. Due to delays and more stringent conditions in the permitting process, ACP now estimates total project costs between $6 billion and $6.5 billion. As a reminder, Duke's share of these costs is 47%.

I want to close by saying that we have a clear view of the path ahead for Duke Energy. With our customers at the center of everything we do, we are transforming our company while providing reliable, safe, and affordable energy. Stakeholders depend on us to deliver on our commitments and we did just that in 2017. From financial results to operational excellence, we created value for our customers and shareholders and this focus will continue into 2018 and beyond. Now let's turn the call over to Steve.

Steven K. Young -- Executive Vice President and Chief Financial Officer

Thanks, Lynn. As mentioned, we had a solid year and delivered on our financial commitments. 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 transition with a focus on stable, predictable, and regulated businesses. We grew our electric utilities through higher pricing and riders, organic load 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 achieved 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, tax reform has been a key focus for the utility industry. We were successful in advocating for industry-specific provisions that will benefit both customers and shareholders. At 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 will result 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 have been in a 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 rate 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 reform to offset the increase in customer rates for Hurricane Irma restoration and to accelerate depreciation of certain holdings. Overall, we expect customers to see savings over time, 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 credits. The new law provides for a full refund of AMT credits over the 2018 to 2021 tax years. 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 result in 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 DRIP. We also have received 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, load growth expectations, and the continuation of our regulatory recovery activities. The effects of the lower corporate tax rate, including the dilution from planned equity issuances, will virtually 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 align with our strategy to modernize the energy grid, generate cleaner energy, and expand natural gas infrastructure. In light of tax 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 spend. Furthermore, we are optimizing our operational capital around regulatory activity to minimize lag. We have modestly increased our level of investment in commercial renewables and will look to utilize tax equity partners to continue investing in solar and wind projects.

Though the total capital plan is lower than originally outlined in 2017, tax reform adds approximately $3.5 billion to rate base by 2021. Earnings base now grows at a 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 builds, 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 maintaining the strength of the balance sheet as we look to finance our extensive capital plan over the forecast year. As I mentioned earlier, in 2018 we plan to issue $2 billion in equity, including the $350 million we already expected to issue through the DRIP. We plan to raise this equity through a discrete transaction within the next few months and by selling shares under our recently filed ATM program. We may utilize a 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 through a combination of our DRIP and ATM programs.

We continue to be disciplined 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 will turn our investments into cash returns more quickly. By 2020, we expect our FFO to debt ratio to be in the range of 15% to 16% and our Holdco 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 with constructive regulatory frameworks and our cost management efforts have allowed us to earn at or near our allowed ROEs. We're seeing strength in 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 for 0.5% annual retail load growth in our electric utilities. In 2017, weather-normalized retail load growth was 0.4%, equivalent to 0.7% when excluding the impact of the leap day in the prior year. This tracks with our planning assumptions.

Several macroeconomic indicators support our load growth projection. Overall, the U.S. economy is strengthening and leading indicators point to continued expansion for the commercial and industrial sectors. In addition, the U.S. dollar continues to support domestic manufacturing and optimism for retail and small businesses is near an all-time high. Furthermore, the objective of the new tax law to stimulate business investment, create jobs, and grow the economy. At this time, we have not incorporated effects from tax reform in our volume growth planning assumptions, 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 functions. As we look to the future, we are developing our digital capabilities to foster a connected culture. Through the modernization of core customer systems and grid infrastructure, we will see tangible benefits and savings.

2017 was a busy regulatory year for us and 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 multi-year rate agreement through 2021. In Ohio and Indiana, we have riders to recovery transmission and distribution investments and are requesting extension of the distribution rider in Ohio. In North Carolina, we now have renewables riders established through H.B. 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 case any day and no later than March 1st. New rates will be effective soon after the order is issued. Our Duke Energy Carolinas rate case is progressing, with the evidentiary hearing scheduled to begin on February 27th. We have requested rates to be effective May 1st 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 of paying a quarterly cash dividend, demonstrating this steadfast commitment to our investors. We expect to maintain our annual dividend growth rate at approximately 4% to 6% through 2022, consistent with our long-term earnings growth as we target a 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 target range initially. Therefore, dividend growth will be closer to the low end of the guidance range the next couple of years as we work the payout ratio back down. The growth rate will increase as we are more solidly positioned in the payout ratio range.

Before we open it up for questions, let me turn to Slide 18. Our history of operational excellence coupled with a strategic plan that is already producing compelling results gives us confidence as we continue to offer a solid long-term investment opportunity. Our attractive dividend yield combined with earnings growth from investments in our regulated utilities provides a strong risk-adjusted return for our shareholders. We are positioned to deliver results for our 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.

Questions and Answers:

Operator

Thank you. If you'd like to ask a question, please signal by pressing "*1" on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is "*1" to ask a question. And we'll take our first question from Shar Pourreza with Guggenheim Partners.

Shar Pourreza -- Guggenheim Partners -- Analyst

Good morning, guys.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Good morning, Shar.

Shar Pourreza -- Guggenheim Partners -- Analyst

Just a quick modeling question. Just can you elaborate a little bit on the drivers of growth from '18 to '19, Steve? I mean, to get 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're closing that gap.

Steven K. Young -- Executive Vice President and Chief Financial Officer

Well, let me discuss some of the drivers here for 2019. And they're really pretty similar to the drivers that we have in our businesses each year. We've got rate riders and rate cases that kick into play. We've got our normal volumes growth, which has been pretty strong as well. And then there's AFUVC on various investments. When you look at 2019, you'll have the full-year impact of the Carolinas rate cases and then in 2019 we expect to see accelerated spending in Atlantic Coast Pipeline. Those will be a couple of big drivers toward the earnings that you might see in that particular year, Shar.

Shar Pourreza -- Guggenheim Partners -- Analyst

Okay, that's helpful. And then just real quick on ACP, it's good that it's moving sort of ahead here, but at what point in the construction cycle should we think about incremental growth opportunities? Is it sort of post the state approvals or the latter part of the construction phase? Like how are you thinking about the next leg of growth with ACP 2 and 3?

Lynn J. Good -- Chairman, President and Chief Executive Officer

Shar, thanks for that question. We're proud of the progress that we've made over the last several months with state and federal permits and our focus is ramping up construction to hit a late 2019 in-service date. I think about additional investment opportunities in two ways. There's 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 established. We'll then turn our attention to expansion, compression expansion, really driven by the needs of our customers. And then following that, we'll look at opportunities to extend.

Shar Pourreza -- Guggenheim Partners -- Analyst

Got it. That's helpful. And then just, Lynn, one strategic question. Duke falls in and out of M&A chatter and 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 our thoughts on how you're thinking about additional growth through inorganic opportunities in light of what you're seeing as far as tax reform and maybe even sort of the stress on the balance sheet?

Lynn J. Good -- Chairman, President and Chief Executive Officer

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, with the equity issuance, it 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 are really comfortable with the organic plan we have set forth.

Shar Pourreza -- Guggenheim Partners -- Analyst

Excellent. Thanks so much. I'll jump back in the queue.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Stephen Byrd with Morgan Stanley.

Stephen Byrd -- Morgan Stanley -- Analyst

Hi, good morning.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Good morning, Stephen.

Steven K. Young -- Executive Vice President and Chief Financial Officer

Good morning.

Stephen Byrd -- Morgan Stanley -- Analyst

Just wanted to touch on what you had mentioned in terms of further growth in renewables in the commercial segment. Just at a high level, I'm curious your thoughts on the competitive environment for renewables, the degree of growth potential there? What are you seeing out there on the competitive playing field for that business?

Lynn J. Good -- Chairman, President and Chief Executive Officer

Stephen, I think the business is a competitive business. I think there's some adjusting as a result of the tariffs that have recently been imposed. We'll have to see how that landscape plays out. We also are facing the lower tax rate. We'll have to determine how tax equity markets perform, although we still expect them to be there. So we believe we have a very solid business, a business that's scaled. We believe we're capable of competing. But 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 regulated renewables as well. So we've got 700 megawatts from building within Florida. H.B. 589 in North Carolina represents an opportunity for either our commercial or regulated business. So we'll be looking closely at those opportunities as well.

Stephen Byrd -- Morgan Stanley -- Analyst

That's helpful and thank you. And just thinking high level around Amazon and the potential for them to put HQ No. 2 in your service territory. Without getting too specific, I'm just curious your thinking at a high level as to what would be required to accommodate that? What kind of incremental capital or operational changes you would need to make to accommodate that?

Lynn J. Good -- Chairman, President and Chief Executive Officer

So, Stephen, I think we're capable of serving Amazon today with a really robust system in the Carolinas. We have the pleasure to serve an expanding facility in Northern Kentucky that we're working closely with them on. The Triangle area around Raleigh has been an important growth area for the company for some time so we'll be anxious to put infrastructure in place, if 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 have the opportunity for the Carolinas.

Stephen Byrd -- Morgan Stanley -- Analyst

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 in grid modernization over and above what you've already laid out or is that likely to be a relatively long evolution in terms of changes you'll be making there?

Lynn J. Good -- Chairman, President and Chief Executive Officer

I believe we have a robust plan, Stephen, where we have been disciplined in establishing business cases for each of these investments, to deliver benefits to customers, whether it's greater customer experience, whether it's reliability metrics. We do have the ability to change the timing, accelerate, slow down, depending upon the needs of customers in each of the jurisdictions. And I would expect as the system continues to grow, which we would see it doing over the next ten years, the Southeast is attracting an incredible number of new citizens, people migrating to this area, that we'll 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 building the infrastructure that our states count on. Same for Indiana, same for Florida, same for Ohio.

Stephen Byrd -- Morgan Stanley -- Analyst

Thank you very much.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Michael Weinstein with Credit Suisse.

Michael Weinstein -- Credit Suisse Securities -- Analyst

Hi, good morning.

Steven K. Young -- Executive Vice President and Chief Financial Officer

Good morning.

Michael Weinstein -- Credit Suisse Securities -- Analyst

To what extent do you see the increase in earnings growth into 2019, 2020 period as driven by the rate base increases coming from deferred tax amortization? In terms of does that give you increased confidence in that ability to get back up to the mid to high range? Because this portion of the rate base growth, it's a certainty, right?

Lynn J. Good -- Chairman, President and Chief Executive Officer

Yes. And, Michael, I think you can see the front-end impact of the loss of interest shield and the dilution. But as you flip back into our slide deck, looking at rate base growth, you can see $2.5 billion to $3.5 billion of rate base over that period. And that's without spending a dollar of capital. So it's that rate base growth in the fundamental business that we operate, low-risk, high-quality jurisdictions, that give us confidence that we can maintain the 4% to 6% growth rate. Really, after we've adapted to tax reform in '18, get back within the range in '19, mid to high in '20 and beyond. So the point that you're making around the strength of the rate base growth is exactly right.

Michael Weinstein -- Credit Suisse Securities -- Analyst

Great. And also maybe you could just comment a little bit about the tax equity market around renewables after the B provisions in the tax reform package.

Lynn J. Good -- Chairman, President and Chief Executive Officer

We believe we'll be successful in that market with the size of our company's scale 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 a project and are seeing success in putting that together. So we're optimistic.

Michael Weinstein -- Credit Suisse Securities -- Analyst

Are you seeing any additional opportunities that may be coming your way as a result of smaller players maybe having a harder time gaining access to that market now?

Lynn J. Good -- Chairman, President and Chief Executive Officer

Michael, there's a lot of opportunity flow that comes through. And compliments to the team as they approach it in a disciplined fashion, to identify projects that make sense for us. But we do see good opportunity flow.

Michael Weinstein -- Credit Suisse Securities -- Analyst

Okay. Thank you very much.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Thank you.

Operator

And we'll take our next question from Jonathan Arnold with Deutsche Bank.

Jonathan Arnold -- Deutsche Bank Securities -- Analyst

Good morning, guys.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Hi, Jonathan.

Steven K. Young -- Executive Vice President and Chief Financial Officer

Morning.

Jonathan Arnold -- Deutsche Bank Securities -- Analyst

Right, Steve, when you talked about what you've 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 about several things you're doing which would do the opposite. So is there any way you could give us, sort of a high level, what's assumed in this FFO target versus the range of potential outcomes?

Steven K. Young -- Executive Vice President and Chief Financial Officer

Yes, Jonathan, we've looked at a number of outcomes and they may vary per jurisdiction. We certainly got a constructive outcome in Florida. In general, what we're thinking about here is that the impact of the rate decrease from the 35% to the 21%, we'll work that through prospective rates and give that aspect to customers. We're looking at the excess deferred tax piece, the protected piece will go back slowly, and we're looking at utilizing the other excess deferred taxes to be used as a mitigant against the rate base increases that are coming as well to help reduce the volatility. But that's a general way to think about the way we've incorporated this into our plans.

Jonathan Arnold -- Deutsche Bank Securities -- Analyst

Okay. So, for example, where you have rate cases pending, at that point, the 35% to 21% would be part of that case? And in other jurisdictions, it would be later? Is that right?

Lynn J. Good -- Chairman, President and Chief Executive Officer

You know, Jonathan, I think -- I'll talk about the Carolinas here too. We are not expecting that tax reform will be a part of the DEP case that we are expecting an order on any time. There is a separate docket that the commission has established. Testimony will be presented in the DEC case around tax reform and I think it is really an open question on whether or not it's dealt with in this case or in a separate docket. But I think in all events, there's an opportunity here to use tax reform to lessen the impact of rising prices or investments in the state.

The other states, some of them will go automatically into place where there are riders. So in Indiana or Ohio, where there's a rider tracking mechanism, those tax reform impacts will go in immediately. Piedmont 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, as Steve said, it'll be really customized jurisdiction by jurisdiction.

Jonathan Arnold -- Deutsche Bank Securities -- Analyst

And can you just touch on ACP in that context?

Steven K. Young -- Executive Vice President and Chief Financial Officer

The ACP project is benefited by tax reform. Again, we've got settled rates with our customers on ACP and it's not a formula type rate there. And so that will be one of the things that benefits us out of tax reform, is the application to ACP.

Lynn J. Good -- Chairman, President and Chief Executive Officer

And you may remember, just one point on that, ACP was a competitive process early on, with negotiated rates 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.

Jonathan Arnold -- Deutsche Bank Securities -- Analyst

So you don't anticipate an adjustment there?

Lynn J. Good -- Chairman, President and Chief Executive Officer

That's correct.

Jonathan Arnold -- Deutsche Bank Securities -- Analyst

Great. Thank you. And then could I just -- when I look at the FFO to debt slide, you show '18 and then you show the '20 to '22, should we assume that '19 is part of a bridge to that new number? Or does it go down a little and then improve? What's the sort of '19 profile as you fill in that gap?

Steven K. Young -- Executive Vice President and Chief Financial Officer

We'll be improving on our metrics throughout the plan, Jonathan. I don't want to give year-by-year guidance but we do see improvement throughout the plan.

Lynn J. Good -- Chairman, President and Chief Executive Officer

It trends up from 2018, Jonathan.

Jonathan Arnold -- Deutsche Bank Securities -- Analyst

And have you had the opportunity to sort of download with the agencies on how the plan looks now you've framed out your equity piece?

Lynn J. Good -- Chairman, President and Chief Executive Officer

We have. Yes, we visited with all three of the agencies, Jonathan, in advance, sharing with them our perspective, the actions we're taking, not only the equity but the reduction in capital, our focus on cost management, our demonstrated track record in pursuing regulatory recovery. So we've had a very comprehensive discussion. We believe we put forward a credible plan to the agencies that supports our reading. Of course, they'll deliberate and look at that over the coming months but we feel like we've had a very good discussion of a very credible plan, as I said.

Jonathan Arnold -- Deutsche Bank Securities -- Analyst

Great. Thank you. And if I might, just the '18, you have 15% to 16% targeted effective tax rate. Is that the right ballpark going beyond '18 or is that lower than you think it'll be?

Steven K. Young -- Executive Vice President and Chief Financial Officer

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 vary a lot from that as we go forward though.

Jonathan Arnold -- Deutsche Bank Securities -- Analyst

Great. Thank you, Steve. Thank you, Lynn.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Julien Dumoulin-Smith with Bank of America Merrill Lynch.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Good morning, Julien.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

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 and beyond, just to make sure 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 gets you to close-ish to 2019, the midpoint of that range, as I think Shar initially asked? And then, again, as you roll forward, take 7% net out of small amount of equity dilution and then, again, that's how you outperform the 4% to 6% from '19 into '20? I just want to make sure we're hearing the puts and takes appropriately here?

Lynn J. Good -- Chairman, President and Chief Executive Officer

So, Julien, I would think about 2019 as 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 in to get that recovery of the increased rate base investment. Because you think about '19 earnings, it's going to have to be rate cases prosecuted in 18 certain of those jurisdictions. We will see the rider impact in other things but within guidance is the way I think about '19. And then by '20, mid to high. Because we have an opportunity for 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 an additional dollar of capital and these jurisdictions, we believe, underpins our ability to get in that range by 2020. Mid to high.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Great. Excellent. And then coming back to a prior question on the commercial side of the business, specifically renewables, can you elaborate a little bit on what's driving your thinking? I think in the commentary, you suggested that you would actually be increasing the size of investment but then perhaps in some of the Q&A, if I hear you right, you're a little bit more cautionary on tariffs, etc. Are you looking to expand this or is this really a statement around H.B. 589 and the opportunities there? Or is there something beyond the Carolinas here that you guys are really seeing out there?

Lynn J. Good -- Chairman, President and Chief Executive Officer

You know, Julien, there was about $1 billion of investment in commercial renewables last year. It is modestly higher than that this year. We have introduced tax equity for the first time. You may recall, before tax reform we thought we would be a tax payer and so would use credit sooner than what's going to happen. So we have looked at that business through the lens of tax equity. We do see opportunities from H.B. 589 and as we just planned the implications of H.B. 589, we put that cash flow in the commercial business for planning assumption. So I think our message here has been consistent. We like 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 H.B. 589 and other market opportunities.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. Excellent. Just last, nitpicking on the FFO to debt question real quickly. The 2018 number you how, is that inclusive of the equity or should we be thinking about the jump, the ratable improvement from 14% up to the 15%, 16% range, the equity being a big chunk of that improvement? I just want to make sure we're level-setting here.

Lynn J. Good -- Chairman, President and Chief Executive Officer

The equity is in the FFO.

Steven K. Young -- Executive Vice President and Chief Financial Officer

Yes, the equity.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

It is reflected in that 14% already?

Lynn J. Good -- Chairman, President and Chief Executive Officer

Yes.

Steven K. Young -- Executive Vice President and Chief Financial Officer

Yes, that's correct.

Lynn J. Good -- Chairman, President and Chief Executive Officer

And, Julien, I think, as you know, an equity issuance impacts the denominator. Right? So it's going to have an impact on FFO to debt but it has a more dramatic impact on our holding company debt, which of course will be declining over the five-year period. So roughly 31%. So more aggressively than what we shared with you last year. The engine for production of FFO is our regulated business and that has not changed from tax reform. So we will go after investment and delivering returns in a way that we historically have, by delivering returns in the regulated process, and that's the engine that drives the FFO growth over the period.

Steven K. Young -- Executive Vice President and Chief Financial Officer

That's right. And our ability to execute in our cost management has helped us exceed the original estimates we have for 2017 in our credit metrics.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Right. Excellent. Thank you.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Thanks, Julien.

Operator

We'll take our next question from David Paz with Wolfe Research.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Hi, David.

David Paz -- Wolfe Research -- Analyst

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 off the midpoint of your 2017 guidance?

Lynn J. Good -- Chairman, President and Chief Executive Officer

It's off of '17, David.

David Paz -- Wolfe Research -- Analyst

Okay. Great. Thank you.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Michael Lapides with Goldman Sachs.

Michael Lapides -- Goldman Sachs & Co. -- Analyst

Hey, 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 to file cases on a pretty frequent basis?

Lynn J. Good -- Chairman, President and Chief Executive Officer

Michael, I appreciate that question because we have drawn our attention to what we're calling regulatory modernization, which is trying to look at the regulatory mechanisms and match those mechanisms to the way investment occurs. And so Indiana, Ohio, multi-year rate plans in Florida, all of those are very well seasoned to work with the types of investments that we're making in the grid and renewable, clean energy, etc. The Carolinas is where we have a little bit of work to do. We're pleased with the result of H.B. 589, which puts trackers in place for renewables and for PURPA contracts, both of which were important. And we, as you may recall, have also filed for a tracker around grid investments. In our DEC case, our intent is to follow on a dual path, as we did with H.B. 589, ask the commission how far they believe they can go and then pursue legislation, if need be, to finalize that work.

I believe it's a win-win. The types 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 as another tool, we should be able to find our way to something that works for customers and for the investments we're trying to put into place. So the focus of modernization is throughout all the jurisdictions but we have some specific objectives we're trying to achieve in the Carolinas.

Michael Lapides -- Goldman Sachs & Co. -- Analyst

Got it. And when you're looking at the Carolinas, what's been the feedback in the rate cases regarding the grid modernization tracker?

Lynn J. Good -- Chairman, President and Chief Executive Officer

So public staff produced some testimony. They have some questions about what is modernization, really questioning the types of investments. They like some of them better than others. We believe that there's a strong case throughout the program around modernization. But they also introduced the notion of a cap, if the commission were to approve a tracker. So I believe there was a good start to a conversation that we'll continue as part of this case.

Michael Lapides -- Goldman Sachs & Co. -- Analyst

Got it. Thank you, Lynn. Much appreciated.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Thank you.

Operator

We'll go next to Praful Mehta with Citi.

Praful Mehta -- Citigroup Global Markets -- Analyst

Hi, thanks, guys.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Good morning.

Praful Mehta -- Citigroup Global Markets -- Analyst

Hi. So I guess just bringing together both the growth trajectory that you have talked about here and the credit that you've laid out, I wanted to understand how tax reform and this discussion with the regulators fits in. Because you kind of highlighted discussion around regulatory asset recovery, accelerated depreciation. So if any of those variables change and the discussion 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 or putting more pressure on the balance sheet? How should we track that?

Lynn J. Good -- Chairman, President and Chief Executive Officer

Yeah, Praful, I'll get us started and turn it over to Steve. He and his team have worked extensively on the implications of tax reform, really digging back into 2017. But you can appreciate any time 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 certainty on the way the commissions are going to address tax reform until later into 2018. But as Steve indicated, we're assuming pretty current return or reduction in rates around the tax rate of 35% to 21%. So I think that's a reasonable assumption that should play out in '18 and beyond in each jurisdiction.

And then on the accumulated deferred taxes, the protected ones go back over life, consistent with normalization rules, and we are proposing that the unprotected deferred goes back over a reasonable period of time. And in some of our jurisdictions, those deferred taxes are actually related to property and 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, depending on how that plays out. But believe we have reasonable planning assumptions. Steve?

Steven K. Young -- Executive Vice President and Chief Financial Officer

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 here to utilize some of this to offset some of the rate base increases that are coming and we'll be looking at the excess deferred as a tool for that. And that was what was done in Florida. I think a very constructive settlement there. So we'll see how it plays out in the other jurisdictions.

Praful Mehta -- Citigroup Global Markets -- Analyst

Got you. So how big is the unprotected piece that needs to be refunded and what assumption is being made on the timing of that refund?

Steven K. Young -- Executive Vice President and Chief Financial Officer

Unprotected deferred taxes are about, for the total corporation, about $1.8 billion. Protected are about $4.5 billion.

Praful Mehta -- Citigroup Global Markets -- Analyst

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 apparently that are connected BP&E but for the rest, is it like a five-year period? Just to get a sense for what kind of timeframe does that refund have to take place in?

Lynn J. Good -- Chairman, President and Chief Executive Officer

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 rider mechanisms will be treated differently than the general rate case. So as we learn more in these dockets that are open in front of the jurisdictions, we'll be prepared to share more specifics on that. But believe that we put together a plan here with a reasonable set of outcomes.

Praful Mehta -- Citigroup Global Markets -- Analyst

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 time frame. 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 then is being paid down during that timeframe?

Lynn J. Good -- Chairman, President and Chief Executive Officer

It's really reflecting the benefit of the equity issuance, Praful. So we are de-levering the holding company with the equity issuance.

Praful Mehta -- Citigroup Global Markets -- Analyst

I got you. So apart from the initial pay down, there isn't anything incremental happening post the '18 timeframe, in terms of de-levering at the Holdco?

Lynn J. Good -- Chairman, President and Chief Executive Officer

So there's a modest trending up, ACP and other things, and then down again. So that the starting point in '18 and the ending point are flat.

Praful Mehta -- Citigroup Global Markets -- Analyst

I got you. So I'm just trying to confirm that post-'19, is there any assumption of debt pay down at the Holdco or no?

Lynn J. Good -- Chairman, President and Chief Executive Officer

Relatively flat end-to-end. We can probably take you through financing schedules after the call, Praful, if there's more detail that we can help you with.

Praful Mehta -- Citigroup Global Markets -- Analyst

Understood. That's super helpful. Thank you so much.

Lynn J. Good -- Chairman, President and Chief Executive Officer

Alright. Thank you.

Operator

At this time, I'd like to send the conference back over to Lynn Good for any additional or closing remarks.

Lynn J. Good -- Chairman, President and Chief Executive Officer

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 delighted to put it forward today. Thank you for your investment in Duke Energy.

Operator

And that concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 57 minutes

Call participants:

Michael Callahan -- Vice President, Investor Relations

Lynn J. Good -- Chairman, President, and Chief Executive Officer

Steven K. Young -- Executive Vice President and Chief Financial Officer

Shar Pourreza -- Guggenheim Partners -- Analyst

Stephen Byrd -- Morgan Stanley -- Analyst

Michael Weinstein -- Credit Suisse Securities -- Analyst

Jonathan Arnold -- Deutsche Bank Securities -- Analyst

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

David Paz -- Wolfe Research -- Analyst

Michael Lapides -- Goldman Sachs & Co. -- Analyst

Praful Mehta -- Citigroup Global Markets -- Analyst

More DUK analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Duke Energy
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Duke Energy wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 5, 2018

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.