Feb 18, 2014
Operator
Good day and welcome to the Duke Energy Fourth Quarterly Earnings Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Bill Currens. Please go ahead.
Bill Currens
Thank you, Whitney. Good morning, everyone and welcome to Duke Energy’s fourth quarter 2013 earnings review and business update.
Leading our call is Lynn Good, 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 materials. You should also refer to the information in our 2012 10-K and other SEC filings concerning factors that could cause future results to differ from this forward-looking information.
A reconciliation of non-GAAP financial measures can be found on our website at duke-energy.com and in today’s materials. Please note that the appendix to today’s presentation includes supplemental information and additional disclosures to help you analyze the company’s performance and our financial outlook.
We have a lot of material to cover today. Lynn will provide an overview of our key 2013 accomplishments and our key priorities for 2014.
And Steve will review our 2013 financial results, introduce our 2014 earnings per share guidance range, and discuss our longer term earnings growth objectives. Additionally, we will have commentary on yesterday’s announcement that we have begun a process to exit the Midwest generation business.
Our prepared remarks today will be a little longer than normal. We will try to get to as many of you as possible during the Q&A portion of today’s call.
For those we are not able to get to, the Investor Relations is available for any follow-up you may have. So now, I will turn the call over to Lynn.
Lynn Good
Good morning, everyone and thank you for joining us today. 2013 was a year of great accomplishment for Duke, our first full year as a combined company.
Our 2012 merger with Progress Energy give us the unique platform to drive efficiencies and grow the business. We are pleased with all that has been accomplished over the last year and a half and also recognize we still have important work ahead of us.
As we announced earlier today, we delivered 2013 adjusted diluted earnings per share of $4.35 and introduced guidance for 2014 of $4.25 to $4.50 per share with the midpoint reflecting 5% earnings growth over the midpoint of our 2013 guidance range. We also confirmed our earnings per share growth objective of 4% to 6% through 2016 off of a base of 2013.
Dividend growth has been and will remain central to our value proposition and our balance sheet remained strong. Our total shareholder return for 2013 was 13%, exceeding the UTY return of 11%.
Our primary focus on 2013 was on positioning our regulated businesses for the future and I believe we accomplished this objective. Our goals were clear, we had to complete our fleet modernization program, achieved constructed outcomes and five rate cases and resolve key issues including the future of the Crystal River 3 nuclear station.
Additionally we had focus on improving the performance of our entire nuclear fleet and realizing our merger integration plan. Let me summarize each of these is outlined on slide 5, during 2013 we completed our $9 billion fleet modernization program.
This program added approximately 5600 megawatts of new combined-cycle natural gas and state of the art coal capacity in the Carolinas and Indiana replacing a similar amount of capacity for older plants we have or are retiring by 2015. The Edwardsport IGCC plant in Indiana went into commercial service in June and in November the Sutton combined-cycle natural gas plant in North Carolina was put into service.
At Edwardsport we have completed GE's new product introduction testing critical and are working towards conducting required performance test. Testing has been delayed in early 2014 b the extreme cold weather in the Midwest which has decreased plant output but we expect to continue tuning and systems optimization and preparation for final testing.
All major technology systems have been validated. We also remain on track to our total revised project cost estimates of $3.5 billion.
Next we reached constructive regulatory outcomes in all five of our general rate cases to recover the investments made to modernize our fleet and replace agent infrastructure and our transition and distribution system. And fully implemented these base rate cases will add about 600 million in additional annualized revenues while at the same time keeping our customers retail rates for national averages.
In Florida we made a decision to retire the Crystal River 3 nuclear plant, resolved insurance claims with our insurance provider NEIL and obtained approval from the Florida Commission of a comprehensive settlement. The agreement addresses cost recovery not only related to the Crystal River 3 nuclear unit but also to the Crystal River 1 and 2 coal units and Levy nuclear project.
Additionally it contains provisions to invest in new generation in the latter half of the decade helping us to meet the future needs of our Florida customers. Next let me also highlight the performance of our nuclear fleet.
In 2013 the combined capacity factor for our 11 nuclear units was 92.8%. This was the 15th consecutive year with the nuclear fleet capacity factor above 90 per ton.
We’re making investments to improve of our nuclear plant while important work remains we’re pleased with the results to-date in particular at the (indiscernible) plant. Let me move to another important area of accomplishment for 2013, fuel and joint dispatch savings which are benefiting our Carolina customers.
Through December 31 we exceeded our original targets and have recorded approximately $190 million of cumulative fuel and joint dispatch savings since the merger closed. We have contractually locked in or generated about 55% of the total guaranteed savings of 687 million over five years.
We’re also realizing cost synergies by eliminating duplicative function and have exceeded our original target of 5% to 7% in non-fuel O&M savings. We’re in pace to deliver about 9% or $550 million of non-fuel O&M savings in 2014 helping us to achieve flat O&M expenses from 2011 to 2014.
Overall we have accomplished what we set out to do and have strengthened our regulated utility businesses in six jurisdictions comprising 85% to 90% of Duke’s annual earnings. Over the next several years we will focus on levering our scale, driving out additional efficiencies and deploying capital for the benefit of our customers.
Next let me provide a brief update on recent events that our Dan River steam station in North Carolina. You may recall that we have retired our coal units of this site in 2012 and replaced them with a new combined-cycle gas station.
In early February we detected a break in stormwater pipe beneath the coal ash basin at the site which resulted in ash basin water and ash being discharged into the Dan River. We estimate between 30,000 and 39,000 tons of ash was released into the water.
We have permanently sealed the pipe and stopped the discharge. Now that the coal ash at the river has been contained our immediate focus is on remediation and clean up at the site.
We will apply any lessons learned for our other coal ash. We continue to monitor and test the water quality of the Dan River.
Our test to-date show that drinking water supply is downstream from the site [ph] our stake. We are working collaboratively with the EPA, the North Carolina Department of Energy and Natural Resources, U.S.
Fish and Wildlife, and other state and local authorities as we respond to this matter. We received the subpoena from the U.S.
attorney in the Eastern District of North California related to the Dan River coal ash discharge. We will cooperate with this investigation.
This accident should have never occurred. We take responsibility and we will learn from this event.
We will continue to update you on this matter. Last week, a significant winter storm struck our Carolinas service territories.
We have quickly deployed about 3,900 field workers in the Carolinas, Midwest and Florida to focus on restoration efforts. We have been able to restore more than 900,000 outages and remain focused on restoring service to the few who remained without service.
I appreciate the effort of the crews that worked safely and diligently in a challenging environment. Next, let me discuss yesterday’s announcement that we are beginning a process to exit our Midwest generation business.
After an 18-month regulatory process, we were disappointed the Ohio Commission denied our application for our cost-based capacity charge late last week. I want to thank the entire Ohio regulatory team that worked so diligently on its filing.
However, this decision gives us clarity. The volatility inherent in emerging generation portfolio has challenged our ability to earn the level of consistent and fair return to our investors.
This business is not a strategic fit for Duke Energy. We have commenced a process to exit the business and have retained advisors to assist in the process.
The redeployment of proceeds from this process is expected to be accretive to our adjusted earnings per share. We will work closely with employees, communities, leaders and our joint owners during this process to ensure a smooth transition.
Additionally, we will move quickly to finalize the required transfer of our coal-based generation assets out of the utility and expect that to occur in the next 50 days. It’s important for me to emphasize that we remain committed to our electric and gas distribution utilities in Ohio and the 1.3 million customers we serve.
These utilities are not a part of this strategic process. Before I turn the call over to Steve, let me summarize our strategic positioning with our remaining commercial businesses.
We see opportunities to continue to grow our renewables platform over the two years and expect a greater mix of solar in our capital deployment. We are targeting 400 million of renewables capital annually and we have the potential to deploy more if opportunities arise.
We also continue to develop commercial transmission options through our DATC joint venture. We expect a project from this venture to mature over the next several years.
Our international business has also been an important contributor to earnings and cash flow. This past December, we returned $750 million of cash in a cash advantage structure.
In 2014, we will undertake a strategic review of our international business as we periodically do with all of our businesses. The review will focus on positioning the business for growth and optimizing cash flows.
We will provide updates as we finalize our review. Now, I will turn the call over to Steve to discuss our financial performance in 2013 as well as our financial plan for growth in 2014 and beyond.
Steven Young
Thanks Lynn. As Lynn highlighted, 2013 was a very good year for Duke.
Let me start with our financial results for the year as outlined on Slide 8. As expected, our fourth quarter results were significantly higher than 2012 due to settlements in our 2013 rate cases, the adoption of nuclear levelization in the Carolinas growth of our wholesale business and the benefits of cost control.
Our adjusted diluted earnings per share for the fourth quarter were $1 compared to $0.70 for the prior year quarter. On a reported basis, our quarterly earnings were $0.97 compared to $0.62 for prior year.
I will focus most of my comments on our full year results. For more details on our quarterly earnings drivers, see our press release materials from earlier this morning.
As Lynn reported, for the full year, we recognized 2013 adjusted diluted earnings per share of $4.35 compared to $4.32 for the prior year. On a reported basis, our full year earnings were $3.76 per share compared to $3.07 in 2012.
Here are highlights of our results compared to our original expectations. For the year, our regulated utilities experienced favorable O&M expenses compared to 2012 supported by the impact of increased merger synergies and the adoption of nuclear levelization.
Just have to offset the impact of unfavorable weather during the year, a consolidated results benefited from a lower than expected effective tax rate of 33% for the year which is principally in our other category. These improved results help offset lower commercial power contributions which included results that renewables lower Midwest coal generation margins and a lack of favorable decision on our Ohio cost base capacity volume.
Results of our International Energy were consistent with our expectations, for the year we experienced unfavorable foreign exchange rates as well as lower results of National Methanol. Unfavorable rain conditions in Brazil impacted our results early in the year.
However these conditions moderated in the back half of the year and our generation volumes were favorable. On slide 9 you can see our weather normalized customer volume trends for the fourth quarter and the full year of 2013 as well as our future growth projections, for the fourth quarter of 2013 our weather normalized low growth was 0.9% higher than the prior year quarter discontinue the favorable trend we began seeing in the third quarter as the economy strengthened.
We continue to experience growth throughout our service territories. For the full year retail load growth was 0.6% higher consistent with our expectations, 2013 was the fourth consecutive year we have experienced overall positive retail load growth principally driven 0.9% industrial usage growth and 0.8% growth in the commercial sector or jurisdictions except for the reported strong retail and office building activity.
Residential demand was 0.3% higher for the year benefiting from 0.8% growth in the average number of customers, usage on a per customer basis continues to trend flat to slightly negative and Florida we’re encouraged by modest recovery in the housing, market and in residential load. As we look ahead to 2014 we’re using 0.5% as our overall load growth planning assumption roughly comparable of 2013.
Although the third and fourth quarter 2013 were relatively stronger we continue to remain conservative as we have not yet obtained consistent sustained growth at these levels. We expect to see growth in 2014 due to an appropriate 1% increase in the number of residential customers, modest growth in commercial including data centers and continuing growth in our industrial sector specifically automotive and housing related industries.
For 2016 we expect lots of trend between 0.5% and 1% as the U.S. economy and GDP strengthen.
Overtime we expect the continued growth in our service territories will result in higher demand for electricity. On slide 10, you can see our 2014 earnings guidance range of between $4.45 and $4.60 per share.
Primary segment drivers I will discuss in a moment are based upon $4.53 per share midpoint of this range. Our largest segment regulated utilities is expected to generate approximately 90% of our 2014 consolidated results, we expect the segment to deliver around $0.11 of additional earnings per share in 2014 over 2013.
Significant drivers include the full year impact of customer rates from our 2013 rate cases in the Carolinas and Ohio, normal weather, customer load growth and increased wholesale contributions. These benefits are expected to be offset by higher depreciation and lower AFUDC equity and reduced benefits from constant renewal amortization in Florida and nuclear levelization in the Carolinas.
Let’s briefly discuss each of these drivers, during 2013 we implemented revised customer rates for Duke Energy, Ohio. In June for Duke Energy progress and September for Duke Energy, Carolinas.
As a result in 2014 we recognized a full year of the benefit of these revised customer rates providing year-over-year earnings per share growth of approximately $0.30 over 2013. A 2014 outlook assumes modest weather normalized retail load growth of around 0.5% which should generate around $0.04 to $0.05 of additional earnings per share.
2013 is a mild year in terms weather, our assumptions for 2014 are based upon normal weather which should add $0.08 of additional earnings per share. In fact the recent past [ph] of coal temperatures we experienced in the Carolinas and Midwest during January resulted in favorable weather.
We also expect some restoration expenses from last week’s winter storm on Carolinas. It's too early in the year to revise our full year projections as we still have 11 months ahead of us.
As you know from past experience weather trends can change quickly. Related to our wholesale business within our regulated footprint, we expect our long-term contracts to provide between $0.07 and $0.08 of additional earnings per share growth in 2014 due to increasing annual load requirements embedded in our contracts.
Additionally, we will see reduced benefits from certain regulatory amortizations in 2014. Let me briefly review them.
First, you may recall that the Florida Commission approved our ability to amortize a certain amount of our cost of renewable liabilities into earnings in a 2010 regulatory settlement. We amortized the final $110 million in cost of renewable liabilities in 2013 contributing around $0.10 per share while there will be no benefit in 2014 from this non-cash amortization.
Additionally, as part of our 2013 general rate cases, we received approval to implement nuclear outage cost levelization in the Carolinas. Once fully implemented in 2015, this levelization has also lower earnings volatility due to timing of refueling outages.
In 2013, nuclear levelization added $0.11 of earnings per share. Due to the timing of planned refueling outages in the amortization of deferred cost, we expect to benefit a $0.05 to $0.06 per share in 2014 less than the benefit recognized in 2013.
Depreciation and other property-related expenses are expected to be higher and we will accrue less AFUDC equity in 2014 resulting in lower earnings of approximately $0.25 per share. This unfavorable impact is principally due to placing our recently completed new generating projects such as the Sutton combined cycle gas plant into service further while cost will increase as a result of the recognition of previously deferred cost resulting from our recent rate cases.
Finally, excluding the impact of nuclear levelization, we are assuming fairly flat O&M cost from 2013 to 2014. Additional merger synergies and lower benefit cost during 2014 will help to offset the impact of inflation in other emerging costs such as higher possible outage costs.
Next, we expect commercial power to generate around $0.16 of additional earnings per share in 2014. For 2014, PJM capacity revenues for the Midwest generation fleet will increase by an average of approximately $60 per megawatt day.
This will result in higher earnings contributions from commercial power of around $0.12. Our 2014 earnings guidance assumes the full year contributions from the Midwest generation fleet, which we have started a process to exit.
We believe it is unlikely we will close on the sale of transaction in 2014. As the estimated fair value of this fleet is below current book value, we expect to recognize a pre-tax impairment charge of between $1 billion to $2 billion in the first quarter of 2014.
This loss will be treated as a special item excluded from our adjusted earnings per share result. Additionally, it is possible the business may be reclassified for accounting purposes to discontinued operations at some point in 2014.
Even if it is classified as discontinued operations, we expect to continue reflecting any Midwest generation fleet earnings in our adjusted earnings per share results. Earnings contributions from our commercial renewables fleet are also expected to increase in 2014.
We currently operate a portfolio of 1,740 megawatts of mostly wind generation with the small, but growing amount of solar. Our results in 2014 will be supported by the 33 megawatts of solar projects we put into service in 2013 as well as the 200 megawatts of wind projects, which are expected to be in service later this year.
Next, international energy, in 2014, we expect segment net income to increase by approximately 3% per share – $0.03 per share, up 5% from 2013’s results. During the year, higher pricing in volumes in Brazil will help mitigate unfavorable foreign exchange rates.
In January, reservoir levels in Southeast Brazil were lower than expected to close the month of level slightly above the order at this point last year. Weaknesses continued in the early portion of February.
The rainy season in Brazil continues through April. We will continue to monitor conditions and keep you updated as the year progresses.
Due to a change in regulatory situations, short-term energy prices in Brazil now include the full cost of thermal dispatch in order to minimize our financial risk with extended drought conditions we are currently contracting at slightly lower percentages than in previous years. As a result, we are less exposed to core hydrological conditions and positioned to benefit from any excess hydrogenation.
For other, we are expecting increase in the effective tax rate. On a consolidated basis our effective tax rate was expected to be between 33% and 34%.
We expect non-fuel O&M to remain flat during the three year period from 2011 to 2014, our cost control efforts will be an important tracker in achieving our 2014 earnings per share guidance range. Let me provide a brief overview on where we’re.
Turning to slide 11, a significant amount of our savings to-date has been related to corporate centric cost. We expect further corporate centric cost reductions in 2015 and 2016 as employees are able to work on a single integrated financial and HR platform.
By the end of the first quarter the remaining employees under our voluntary severance plan will leave the company as we drive further efficiencies. We’re also achieving significant supply chain benefits as we continue to renegotiate procurement contracts.
We continue to benefit from our scale as a larger purchaser of materials, supplies, inventory equipment and services. We have completed around 60% of our merger initiatives and expect the remainder to be essentially complete by the end of this year.
Next I will discuss the shaping of our quarterly results in 2014 as highlighted on slide 12, in 2013 our earnings were more heavily weighted towards the back half of the year due to the significant impact of our regulatory activity. As we move into 2014 we expect a more normal distribution of our quarter-to-quarter earnings compared to last year.
As a result you will find during the year the comparisons of our quarterly results in 2013 to 2014 will once again be challenging. We expect higher year-over-year results in the first three quarters of 2014 and lower comparable results in the fourth quarter.
These expectations assume normal revenue. As in past years we expect the third quarter to be the most significant contributor to our annual results due to summer load demand.
Our 2014 cash flow and financing assumptions are summarized on slide 13, you can see that our sources of cash flow in 2014 are estimated at approximately 7.7 billion compared to total sources of around 7.3 billion in 2013. This increase is largely driven by the full year benefit of revised customer rates in 2013 as we convert our modernization investments into cash earnings.
We expect capital investments of approximately 6.1 billion most being in regulated utilities. Dividend distributions to our shareholders are expected to get around 2.2 billion while discretionary contributions to our pension plans are expected to be approximately 145 million.
Through the significant growth investments we’re making, we expect our uses of cash will exceed our sources of cash by around 800 million during the year. In order to fund this deficit as well as our debt maturities of approximately 2 billion we expect to issue around 3 billion of total debt including commercial paper.
Our financing plan for 2014 is outlined in the chart on the right side of the slide. As you can see most of our financings are driven by maturities of long term debt.
Our current credit ratings and projected metrics for 2014 are outlined on slide 14. We’re pleased Moody’s action few weeks ago to upgrade the ratings of our holding company and four of our utilities.
As results of the strength of our metrics our plans do not require any incremental equity issuances during our three year planning horizon from 2014 to 2016. As of the end of 2013 our total available liquidity of 5.6 billion excluding cash held offshore for approximately 1.1 billion.
Slide 15, provides an overview of the primary drivers of our 4% to 6% earnings per share growth objectives through 2016. Let me explain how we get there.
Our regulated utilities are expected to contribute an average of 12% growth underpinned by rate based growth. Customer load growth of between 0.5% and 1% and growth in our wholesale business.
Both sales is expected to contribute an additional $0.07 to $0.08 of earnings per share in 2014 and 2015 while moderating to around an additional $0.01 to $0.02 per share in 2016. This adds around 2% of earnings per share growth through 2016.
This growth is expected to be partially offset by the impacts of regulatory lag and additional depreciation since we do not have significant rate case activity planned through 2016. We are targeting flat O&M cost from 2014 to 2016 as the success of our merger integration, savings helps offset inflationary pressures and other emerging cost more details on that in a minute.
Next we expect our non-regulated businesses to be modestly higher through 2016, commercial power is expected to add around 1% of average earnings per share growth as we continue to expand the renewable portfolio. International Energy is expected to be relevantly flat through 2016.
The reduction in contributions from National Methanol as well as unfavorable Brazilian foreign currency exchange rates is expected to be substantially offset by an average annual increase in Brazil pricing of approximately 6% through 2016. You may recall that our ownership percentage in National Methanol decreases from 25% to 17.5% upon completion of the new production facility, which is estimated to occur in mid-2016.
The incremental earnings from these new facilities are not expected to fully offset the reduction in our ownership percentage. As a result, the annualized impact of this change is estimated to reduce our equity earnings from National Methanol by around 25% to 30%.
As you know, earnings from National Methanol are correlated to Brent crude oil prices. Our forecast assumes low year-over-year volatility in Brent crude oil prices through 2016.
Our other category is expected to incur higher interest expense as we continue to finance at the holding company level and our effective tax rate is expected to trend higher. We have also included up to 1% of additional growth from capital redeployment and the incremental investment opportunities.
Redeployment of proceeds from our Midwest generation process is expected to be accretive. We also continue to develop additional growth opportunities such as the NCEMPA transaction, which I will discuss in a moment.
Taken as a whole our planned results and solid earnings per share growth within our long-term 4% to 6% objectives. Now, let me move to our efforts to maintain productivity and efficiency in our cost structure.
We have made tremendous progress in achieving cost savings from the merger. Our merger process has given us confidence that we can continue to drive operational efficiencies throughout the organization in the generation of power delivery to additional savings in the corporate center.
We are applying lessons learned from our merger integration initiatives and driving further efficiencies from our recent system consolidation efforts. We have initiated efforts to consolidate our enterprise asset management and award management systems into a single platform of the process underpinning efficiencies in many of our functional departments.
As a result, we are targeting flat O&M through 2016. Our overall growth is supported by investments in our businesses.
In 2013, we spent approximately $5.6 billion, of which approximately 90% was in our regulated utilities. As outlined on Slide 17 from 2014 through 2016, we are forecasting total CapEx investments of between $20 billion and $22 billion.
Consistent with our business mix, about 85% or approximately $17 billion of this CapEx is expected to be deployed in our regulated utilities, an annual average of around $6 billion. Let me provide a further breakdown of our regulated utilities capital investments over the three-year period from 2014 to 2016.
Over the three-year period, we expect to spend $3.4 billion on new generation growth projects principally in the Carolinas and Florida. These investments also include nuclear performance improvements in compliance with the NRC regulations.
First, let’s discuss the Carolinas. We have a sophisticated public convenience and necessity, request pending with the South Carolina Commission related to the 750 megawatt lead combined cycle natural gas plant.
Hearings have been held and we are expected to make a decision by the end of the second quarter. It approved the plant could be in service as early as mid-2017.
This project will include non-cash AFUDC earnings during the construction period. We also continue to make investments to improve the performance of our nuclear fleet in the Carolinas and to comply with the NRC’s Fukushima requirements.
Further, we are evaluating regulated total investment opportunities to meet our renewable portfolio standard requirements in North Carolina as well as the growing desire for renewable generation sources. We recently issued an RFP for up to 300 megawatts of solar in North Carolina targeted to be in service by the end of 2015.
We will evaluate both purchase power and ownership options as part of the RFP process. Moving next to Florida, our recent settlement agreement gives us the ability to invest in additional peaking and base load generating capacity.
Once in service, we were able to recover prudently incurred investments related to this generation without the need to a file a general rate case. We continue to evaluate options related to the need for up to an additional 1,150 megawatts of capacity by 2017.
This consists of a mixture of self-build acquisition upgrades or PPAs. The amount of additional capacity is likely to be reduced if we are able to obtain approval to burn non-traditional coal at Crystal River 1 and 2 units through 2018.
We expect to make filings with the Florida Commission by mid-2014 outlining the most cost effective options for our customers. We have also issued an RFP to approximately 1640 megawatts of combined-cycle gas for our base load generation in Florida in 2018.
We’re evaluating proposal submitted from our residential [ph] power providers also submitted our own self-build option. We expect to finalize and announce the most cost effective options for our Florida customers by late summer this year.
We’re also assessing transmission and distribution investments and increase the reliability of our systems. In Indiana we’re continuing to develop a plan under Senate Bill 560 that could potentially filed with the Indiana Commission later this year.
Items under consideration include investments to improve our reliability, to our customers as well as to improve the type and timing of information we can provide to them. While our analysis is still ongoing we expect potential investments between $1 billion to $2 billion over seven years.
We will provide further updates on the scope of our plan when it is being finalized. Senate Bill 560 allows for recovery of qualified transmission distribution projections to a wider mechanism.
The plan also includes T&D investments in Ohio which are subject to wider recovery as well as further consolidation and investments to upgrade certain control centers throughout all of over service territories. Next, let me review our environmental compliance expenditures.
Over the past decade our legacy companies span approximately 7 billion investing in scrubbers and SCRs based on our current assumptions and the timing of final regulations and how the EPA will adopt rules around air, water and residual waste. We currently estimate we will spend between 4.5 billion and 5.5 billion over the next 10 years with 900 year expected to be spent in the 2014 to 2016 time frame.
Approximately 85% of our expected environmental compliance investments within the Carolinas and Indiana both of these jurisdictions are the strong track record of allowing utilities to recovery cost related to environmental compliance investments. We have environmental tracking mechanisms in Indiana and Florida.
In 2014 to 2016 we will spend 1.6 billion on nuclear fuel the cost of this recovered utilized is through our fuel costs [ph] and the other 1.4 billion is expected to be spent to expand our distribution system as we connect additional customers and increase our revenue base. Finally we will invest in maintaining the reliability and performance of our system from 2014 to 2016 we expect to spend approximately 9 billion on maintenance of our system.
Principally offsetting our annual depreciation. In our non-regulated businesses we expect to spend approximately 1.5 billion over the three year period from 2014 to 2016 an average of around 500 million which consist of growth capital of 1.2 billion for our renewals business as well as an additional 300 million in maintenance capital for our Midwest generation and International businesses.
Our range includes a level of discretionary capital of $2 billion in 2014 to 2016 giving us flexibility to pursue opportunities for incremental growth projects in both our regulated and non-regulated business. In a moment I will discuss some potential opportunities we’re evaluating.
In 2016 we begin construction of new generation plants to be in service, in 2017 and 2018 principally in the Carolinas and Florida. This will cause the range of our CapEx investments to accelerate in 2016 and beyond.
Next I will provide details on the incremental investment projects I mentioned previously. First, as we announced earlier this morning.
We have been in exclusive discussions with the North Carolina Eastern Municipal Power Agency regarding the potential to purchase their minority ownership interest in certain existing Duke Energy progress plants, a total of 700 megawatts of coal and nuclear generation. An agreement is reached, there are several approvals we would need to obtain for this transaction potential next steps would include a filing with the FERC, a request with the NRC to approve the transfer of the nuclear licenses, the DOJ antitrust approval as well as approvals from the Carolinas Commissions.
It is too early to speculate on the timing needed to complete the transaction as negotiations are still ongoing. If we’re able to reach an agreement we would enter into a long term wholesale power contract with NCEMPA.
We will keep you updated. An additional growth opportunity is the potential for gas infrastructure investments across our regulated jurisdictions.
You were reminded of the importance of robust gas infrastructure during the recent extreme cold January weather. We intend to explore the viability of additional pipeline capacity into various jurisdictions to expand the infrastructure necessary to continue to support and expanding to aspire generation fleet.
We also have the potential to invest in additional non-regulated renewable projects above our annual capital budget of approximately $400 million. Additionally, we continue to evaluate growth investment opportunities and projects at international that meet our risk-adjusted return expectations.
Next, let me discuss the dividend payment to our shareholders, a cornerstone of our investment value proposition. As you can see on Slide 19, we have consistently increased the dividend at an average of 2% annually over the last several years.
The Board ultimately has final say about the dividend. We believe the Board has the flexibility to increase the growth in the dividend to be more consistent with our earnings per share growth once we have achieved our targeted payout ratio of 65% to 70%.
Based on the midpoint of our 2014 guidance range, we expect our payout ratio this year to be at the top end of the range at around 70%. I will close on Slide 20 with a discussion of our financial objectives.
We have a strong track record of meeting these objectives. In addition to being well-positioned to achieve our 2014 EPS guidance range, we have a solid plan to deliver longer term EPS growth of 4% to 6% through 2016, while growing earnings we will continue to support the dividend payment to shareholders while maintaining a strong balance sheet.
In summary, I am very pleased with our financial performance for the year and how we are positioned for the future. We will maintain our strong growth platform to investment opportunities in both our regulated utilities and our commercial businesses.
We will continue to focus on providing our customers with low cost and reliable service while we drive efficiencies across the entire business. Now, I will turn the call back over to Lynn.
Lynn Good
Thank you, Steve. Let me briefly close with our priorities for 2014 and beyond as outlined on Slide 21.
Simply stated, we will focus on achieving our financial objectives, including our earnings per share guidance range for 2014 as well as the growing a dividend and maintaining a strong balance sheet. We will also focus on driving further productivity in our businesses and deploying capital for the benefit of our customers and shareholders.
As I mentioned, we will also turn our attention to enhance value from our commercial businesses, including advancing our process to access the Midwest generation business. We will maintain our focus on strong outreach to our important state and federal stakeholders as overall industry times and regulations continue to evolve.
Duke Energy is a low-risk long-term holding with an excellent track record of performance. I am honored to lead this company and work with an extremely talented team.
I am very pleased with what we have accomplished in 2013 and our platform gives us many opportunities to grow the company and create value for our customers, investors and communities. With that, let’s open the phone lines for your questions.
Operator
(Operator Instructions) And we will take our first question from Shar Pourreza with Citigroup.
Lynn Good
Good morning, Shar.
Shar Pourreza
We have sort of reiterated your EPS growth trajectory of 4% to 6% off for 2013, but looking at Slide 17, it looks like your CapEx profile looks flat beyond 2016, is that sort of a placeholder and how should we think about the EPS growth trajectory if you were to exit the Ohio business given the fact it could be accretive?
Steven Young
I think our CapEx profile does grow beyond 2016. I think back in our appendices we show that our rate base growth moves in the range of 6% beyond 2016 as we ramp up the lead combined cycle plants essential for the Florida combined cycle.
And also we will see a change in 2016 and beyond as we become a significant taxpayer in a decrease and deferred taxes now put on to push on our rate base as well, Shar. So I think we do have growth in the earnings base.
Shar Pourreza
Got you. Very helpful.
And then just when you think about potential uses of cash as you exit Ohio generation, is there any areas that we should be not thinking about as far as the source of cash or I think when you are maybe potentially quoted in media as so the cash could be buybacks, is there anything we should focus or what we could roll out?
Lynn Good
Yeah sure. We haven't made a decision on use of proceeds; we would like this process to mature over the course of 2014 and we will look at incremental investment opportunities that maybe right and what I also would say is we would not roll out a share buyback but this decisions will made down the road as we complete the process.
Operator
And we will take our next question from Dan Eggers with Credit Suisse.
Dan Eggers
Glad you guys (indiscernible) determination on commercial operations, can you just clarify when that the earnings contributions included in guidance for both 14 number and the growth rate and then if it comes out what are you using for substitution to help sustain the growth rate beyond 2014?
Lynn Good
Dan the earnings contribution of the Midwest generation is in 2014 and then as we think about the build-up for growth over the 14 to 16 period we believe that redeployment of the proceeds will be accretive and be a strong contributor to the 4% to 6% growth rate.
Dan Eggers
Do you have a place holder beyond ’14 for using some assumption of cash for debt pay down or some other reinvestment to support the growth rate is that the right way to think about it?
Steven Young
That’s correct.
Dan Eggers
And then on International if I look at kind of the contribution of your growth rate drivers usually kind by business line out through ’16, your International looks like you kind of hit at zero contribution through the growth rates which is kind of trending water over those years. How does that slow the flat looking outlook effect the strategy review you guys are going through right now?
Lynn Good
Dan I would say it's an catalyst for the review. We look at a strategic review of the International probably 5 or 6 years.
We think it's appropriate to do so again, we do this periodically for all of our businesses. We’re pleased with the International business, the contributions that they have made overtime but we would like to explore positioning for better growth and for optimization of cash flow so that will be your focus in ’14.
Dan Eggers
Is the impairment you guys took on commercial or the money will take given that extra cash surplus, does that make it easier to think about monetize International because you’ve a better offset to maybe any refilteration [ph] cash you would have to deal with?
Lynn Good
Dan I wouldn’t jump to monetization of International. What I would suggest is let us work through the process and evaluate a range of options and as we complete our review we will be in a position to talk further about it.
Operator
And we will take our next question from Jonathan Arnold with Deutsche Bank.
Jonathan Arnold
Couple of quick questions just to clarify on things that you’ve already just answered them I’m afraid. On the Midwest and you said the use of proceeds will be accretive and in the other statement net of losing the earnings of business and the accretion, okay so it's an aggregate state it's not just you will have accretive offset.
Lynn Good
That’s right.
Steven Young
That’s correct.
Jonathan Arnold
And then on International you talked about a 6% CAGR I think somewhere in the slides for the pricing assumption in Brazil. Can you just is that something you’ve clear line of sight on currently how much of that is already priced and how much of that is an assumption?
Steven Young
We have pretty good line of sight for that Jonathan. Our revenue pricing in our contracts in Brazil is tagged to inflation indices that have been pretty consistent and they are on lagging indices so we have already seen some of those metric come through and the forecast for inflation in Brazil and so forth are pretty stable and so we feel pretty good about this pricing metrics.
Jonathan Arnold
So you don’t have kind of recontracting embedded in that assumption, that’s just the current contracts in place?
Steven Young
That’s correct.
Operator
And we will take our next question from Julien Dumoulin-Smith with UBS Investments.
Julien Dumoulin-Smith
Quick question following up on the International strategic review, could you elaborate perhaps on what those options are more specifically?
Lynn Good
Yes, Julien, I think it’s premature to talk about the range of options. What I would say is just emphasizing looking at rate to position the business to grow and also ways to further optimize cash flow.
The fact that we were able to identify an bring 750 million home, I think is a good indication of works that we put underway in 2013 and we will just continue that strategic focus in ‘14 as we have more information, we will of course sharing.
Julien Dumoulin-Smith
And just to be clear, anything you would do would need to be accretive?
Lynn Good
I think that’s a good turning point.
Julien Dumoulin-Smith
Alright, just to be clear. And then perhaps looking at the earned ROE assumption in the buildup if you will of the 4 to 6 years of regulatory lag plus depreciation of minus 3%, what kind of earned ROE degradation or what have you are you assuming as you think about the New Year period, the three-year?
Steven Young
We project that we are going to be earning very close to our allowed returns in all of our jurisdictions. You do have regulatory lag, but you have also got new investments that are going into Reuters and accruing AFUDC and earnings and so forth.
Additionally, one of the big key elements that gets us to a rate freeze period is being able to eliminate rate lag due to O&M increases keeping O&M flat is very significant here and should help us to earn our allowed returns.
Julien Dumoulin-Smith
And then lastly quick question on the ‘14 assumption on guidance, there is a big other jump from minus 128 to minus 215, could you talk about that quickly?
Steven Young
Yes, in the other area that we are looking at two things that occur there, you got Holdco interest expense, which goes up as you issue a Holdco debt to fund some of the growth in the business and then we do expect our effective tax rate to jump and increase by roughly 1% and the effective tax rate goes up for a couple of reasons. One is that as you move forward, the Progress entity has less permanent differences, less tax benefits, so when it’s mixed into the Duke entity as a whole, which has renewables and international, it pushes the effective tax rate up a bit.
Also we are seeing that we have less AFUDC equity impacts in the tax rate, so that drives the effective tax rate up a bit as well.
Julien Dumoulin-Smith
Great, thank you.
Lynn Good
Thank you.
Operator
And we will take our next question from Brian Chin with Merrill Lynch.
Lynn Good
Good morning Brian.
Brian Chin
Hi, good morning, Lynn. Good morning Steve.
For your comments on Slide 18 on transmission and gas infrastructure, could you talk a little bit more about what opportunities might manifest themselves as you complete your evaluations?
Lynn Good
Brian, this is an early stage evaluation of infrastructure in the Southeast as we continue look at adding gas fired generation in the Carolinas, in particular, we have independent CGR on a pipeline infrastructure that we brought to explore other options. And so this is something that is on our radar screen for strategic growth and objective that we would like to achieve.
We also think it’s important for reliability for customers and so we will be exploring that over the next year or two to see if an investment makes sense.
Brian Chin
Should we be thinking about that in the terms of gas or pipeline investments potentially that connect to your gas fired generation? Is that sort of the primary thrust of where that thought process is going?
Lynn Good
Yes.
Brian Chin
Great. And then just one other question on this slide for commercial solar and your wind assets in general, just how do you think about the opportunity to construct a Yieldco like some of your peers?
Steven Young
We have looked at Yieldcos, Brian. And we will continue to keep an eye on those types of financing vehicles, but a couple of things to keep in mind on a Yieldco that we are looking now.
One is that we trade as a Yieldco already and so isolating assets there may not have as much incremental benefit for our shareholders. Another thing you have to keep an eye with Yieldcos is they require very disciplined investment profile.
You typically have to match up the investments with tax benefits that roll off under accelerated depreciation and it requires quite a disciplined investment in capital and that flexibility in our capital planning maybe a hurdle in setting up a yield curve.
Operator
And we will take our next question from Hugh Wynne with Sanford Bernstein.
Hugh Wynne
My question goes to the ash pond cleanup issue, you’ve been under some you have been fighting some legal suits in the Carolinas regarding supposed groundwater contamination if I remember correctly and now we have the Dan River break and at the end of this year I think EPA will come out with it's coal ash regulations. What is long term thinking of regarding how you’re going to handle that?
Are those cost included in your environmental CapEx and what will be the prospects for recovery?
Lynn Good
Let me break that question down. I will speak first of all about Dan River, we have been very focused over the last two weeks with a 24/7 operation to put a permanent solution in place and to begin remediation.
We will take the learning from this experience and look for ways that we can improve overall management of our ash ponds and we are very focused on ensuring the integrity of our basins throughout our system and so that effort will continue. If I could position [ph] to the broader level about ash pond remediation and implications of the coal combustion residuals we do expect the two rules by the end of this year and when Steve talked about the $4.5 billion to $5 billion that does include ash pond closures, it also includes conversions to dry handling and so those estimates will continue to be updated and evolve as these regulations are finalized.
Hugh Wynne
Is recovery ordinarily available in the place where the plants are located?
Lynn Good
Yes. We have had a good history of environment recovery and I think 85% of our environmental costs are in Indiana and the Carolinas and we have again through the recovery of environmental cost in both of those jurisdictions.
Hugh Wynne
Just a quick follow-up of an earlier question regarding the other segment, the significant decline in expense in that segment relative to your expectations. I think you were expecting something like 205 million and you ended up incurring only 128 million.
Is that also attributable to upgrade law change in the effective tax rate or are there other factors apply?
Steven Young
Income taxes were a large portion of that. We have found have some state optimization tax benefit opportunities that we took advantage of, there were also some lower cost in our captive insurance area as well.
Hugh Wynne
The losses from your insurance policies are not as high as you had anticipated?
Steven Young
That’s correct.
Operator
And we will take our next question from Michael Lapides with Goldman Sachs.
Michael Lapides
I want to ask about the dividend and dividend growth, at what point do you think you will be at a stage where dividend growth is within the same range or close to earnings growth and is there ever a stage coming for Duke where dividend growth is faster than earnings growth?
Lynn Good
I will take the first part of the question Michael, we’re trending to 70% in 2014 and so we will look very closely at increasing the level of the dividend in working with the Board of course but it's ultimately their decision but our aspiration is to grow the dividend ever trying consistent with earnings growth. I think the latter part of our question is probably something that is few years out that we look at the way the macro trends in the business continue to evolve.
So I think our objective is always put together a combination of earnings growth and dividend that’s attracted to our shareholders and that objective won't change.
Michael Lapides
And then an environmental question, I mean there is obviously lots of talk about potential carbon rules coming out this summer or a little later. Could you talk a little bit about what’s in your expectations in terms of what the rules for both coal ash and 316(b) could look like?
Lynn Good
We have specifics and key trends here. Michael let me direct the question to Keith, he can give you a little bit of visibility and what’s in our plan over the next three years and then you can talk me on that.
Keith Trent
Michael with respect to coal ash we do expect that it will be designated as non-hazardous so that’s the general assumption that we’re working with, in terms of specific investment we have very detailed plan. What I would tell you is the four largest categories of spend one is on (indiscernible) and then we have precipitator refurbishment at six plants we have dry ash conversion at multiple plants and then also ash pond closure.
So this was the four biggest conversions, biggest spins that we have in this category. But again in terms of CCR we’re expecting non-hazardous.
Michael Lapides
Got it. Last item just a tax, cash flow related question.
What do you see I noticed the guidance for commercial power and the commercial business you know it's a seems like it's been driven largely by tax benefit, am I interpretation that correctly that acting as one of the slides and I want to make sure you assume a 40% to 50%, 50% to 60% tax benefit at that business?
Steven Young
At the renewables business a great deal of the economics are driven by tax benefits that’s correct Michael.
Michael Lapides
So the assumption then that the actual EBITDA that business combined of a commercial power is kind of pretty low but the renewable business the tax benefits drive kind of the uptick in earnings power from the business?
Steven Young
That’s correct Michael.
Operator
We will take our next question from Kit Konolige with BGC.
Kit Konolige
So to get back for a second to the Midwest generation, can you elaborate a little bit on the discussion of your expectation for taking the charge on that business if I wrote it down correctly you said that you expected a charge of 1 billion to 2 billion in 2014 which as I understood it, it would be the difference between the your kind of projected fair market value versus the book value?
Steven Young
That’s correct Kit.
Kit Konolige
And Steve what’s the book value currently on that?
Steven Young
The net book value of the property, plant and equipment net of accumulated depreciations in the ballpark of 3.5 billion. There will be other items that could come into play in this calculation, inventories deferred taxes, some of those kind of things.
I don’t want to be over precise by 3.5 billion is the property, plant and equipment.
Kit Konolige
And you said you don’t expect any transaction to close in 2014?
Steven Young
That’s correct.
Kit Konolige
So can we understand from that that the sale process might take something like what six months or something like that?
Lynn Good
I think the facts were announced yesterday and we’re taking advisors in play. So I think we will be in a position to give you more clarity on timing as we move into the first quarter call but based on our present expectations we think a 12 month period is probably a reasonable planning assumption.
Kit Konolige
A 12 month period Lynn from now until closing or now until an announcement of the sale?
Lynn Good
Now until closing.
Operator
That concludes today’s question and answer session. Mr.
Bill Currens at this time I will turn the conference back over to you for any additional or closing remarks.
Lynn Good
Thank you and thank you for interesting in Duke Energy. We look forward to seeing many of you in the weeks and months ahead.
So thanks again.
Operator
This now concludes the presentation. Thank you for your participation.