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Vectren Corporation (NYSE:VVC)

Q4 2012 Earnings Call

February 15, 2013 11:00 AM ET

Executives

Robert Goocher - VP, IR

Carl Chapman - President and CEO

Jerry Benkert - EVP and CFO

Analysts

Michael Gaugler - Brean Murray, Carret & Co.

Sarah Akers - Wells Fargo

John Hanson - Presidus

Paul Patterson - Glenrock Associates

Operator

Good afternoon, my name is Melissa, and I will be your conference operator today. At this time I would like to welcome everyone to the Vectren Corporation 2012 Year End Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions).

Thank you. Mr. Robert Goocher, Treasurer and VP of Investor Relations, you may begin your conference.

Robert Goocher

Thank you operator. Good morning, and thank all of you for joining us on the call to review Vectren’s 2012 year end results and 2013 guidance. This call is being webcasted. Shortly following its conclusion a replay will be available on our website at vectren.com in the Investor Relations section. Yesterday we released our 2012 fourth quarter and full year results and this morning we filed our 2012 10-K. Copies of the earnings release, today's slide presentation and the 10-K can all be found on our website.

As further described on Slide 3, I would like to remind you that many of the statements made on this call will be forward-looking statements. Actual results may differ materially from those discussed in this presentation.

Carl Chapman, Vectren's Chairman, President and CEO, will provide opening comments on 2012 results and 2013 guidance and will review Vectren's key financial and operating goals. He will then turn it over to Jerry Benkert, Executive Vice President and CFO, who will discuss in more detail 2012 results and 2013 expectations for each of our business groups. Following our prepared remarks, we will be glad to answer any questions you might have. Also joining us on today's call is Ron Christian, Executive Vice President and Chief Legal and External Affairs Officer.

With that, I'll turn it over to Carl.

Carl Chapman

Thanks, Robert. I'd also like to welcome everyone to today's call, and as always, we appreciate your interest in Vectren. To begin, I’d be like thank all of the employees of Vectren and our subsidiaries who worked so hard to make 2012 a great year. These efforts not only helped to produce outstanding earnings in 2012 but to put Vectren in position in recent weeks to see our stock price reach an all-time high. Our goal continues to be consistent earnings growth. As you will see on Slides 4 and 5, full year 2012 earnings were $159 million or a $1.94 per share, compared to a $141.6 million or a $1.73 per share in 2011.

For the quarter Vectren's earnings were $42.8 million or $0.52 per share, down slightly from $46.6 million or $0.56 per share in 2011. As a reminder, 2011 full year and fourth quarter results include the gain on the sale of our former gas retail operations Vectren Source.

Vectren’s Utility Group had solid 2012 earning with earnings per share of a $1.68, compared to a $1.50 in 2011. This growth in regulated earnings was driven by our Utility Group’s ability to collectively earn very-near their allowed return, driven by our full year of electric rates implemented in May 2011, lower interest expense and controlling operations and maintenance cost.

Some 2012 Utility highlights include an exceptional year for employee safety where our utility operations match performance in 2011 when we were recognized as a best in class safety performer by the American Gas Association. Also, we completed our four year construction of a new high voltage transmission line that will help improve our overall system reliability and receive regulatory approval to begin recovering loss margin from small electric customers similar to our recovery mechanism for large customers.

On the non-utility side, full year 2012 earnings of $0.26 per share represented an another good year of contributions from our non-utility group and a healthy increase over 2011 setting aside the gain on the sale of Source. The highlight of the group was obviously Infrastructure Services, comprised the Miller pipeline in Minnesota Limited which had a record year and contributed $40.5 million of earnings, supported by strong demand in both transmission and distribution businesses and very favorable weather that allowed the construction season to start early and continue virtually uninterrupted for most of the year.

Earnings from energy services were impacted by continued weakness in the near-term demand form performance contracting projects and our continued investment and additional sales and related support professionals for long term growth. Full year 2012 earnings were bolstered by tax deductions related to energy efficiency projects which help boost earnings as the sales force continues to ramp up and begins to fill the pipeline with new projects.

After a strong 2011 coal mining results faced headwinds throughout 2012, as weak demand persisted due in part to weather and its cold gas switching spike for a period of time in 2012 where natural gas prices dropped well below $3. We also experienced difficult mining conditions at our Prosperity mine in 2012, which Jerry will expand upon later. However, our Oaktown 1 mine had a very successful year of operation in 2012 and development of our Oaktown 2 mine was substantially completed, making it ready for production as soon as demand picks up.

Results at ProLiance, while still producing a loss for the year, continue to improve as demand cost reductions translate to a better bottom line. Finally, for the 53rd consecutive year, Vectren raised its dividend to paid to shareholders. We are very proud of our dividend growth record which demonstrates the stability of the dividend and serves as an important part of our value proposition for our shareholders. So, a lot to be proud of in 2012, both financially and operationally, but as always, there are areas for improvement in 2013.

With that we’ll move to slide 6 and on to our 2013 guidance. We expect 2013 consolidated earnings per share in the range of $1.90 to $2.10, including expected near breakeven results of ProLiance. We expect 2013 utility group EPS to be within a range of $1.65 to $1.75 per share and the nonutility group EPS to be in a range of $0.20 to $0.40 per share.

The table in the lower part of the slide gives you a comparison of the 2013 guidance midpoints to the reported EPS results for 2012, ‘11 and ‘10. As you can see we have had over 6% annual earnings per share growth over this period, including our expected growth again in 2013.

In a few minutes Jerry will provide you with little more insight as to the drivers and assumptions supporting our expectations for the various businesses in 2013. Before we expand on 2013 guidance though I’d like to share a few thoughts on overall valuation for Vectren.

On Slide 7, we’ve listed several financial goals and business profile characteristics to consider when valuing Vectren. First and foremost, Vectren is primarily utility company, and I expect our Utility business to contribute 80% to 90% of annual consolidated earnings. At the highest level we target an 8% to 10% total shareholder return that consist of 4% to 5% consolidated earnings growth coupled with a 4% to 5% dividend yield.

We expect earnings growth of approximately 3% from Utility operations and approximately 10% overall from our nonutility businesses. Expected future Utility earnings growth is supported by gas system infrastructure investments for controlling O&M in order to continue to earn, add or near allowed returns.

Our non-utility portfolio will remain centered around our investments in infrastructure services and energy services, which we believe offer investors a less volatile earnings steam than our commodity related nonutility businesses. Long term, we are targeting a consolidated dividend payout ratio of 65% that is supported by 70% of our utility earnings. These targets align nicely with our focus on maintaining our A3 and A minus credit ratings at Moody’s and S&P respectively, which should remain stable reflecting our strong balance sheet and liquidity profile.

Turning to Slide 8, let’s take a look at our strategies to grow earnings and achieve our financial goals. Our overarching Utility goal continues to be earnings growth of approximately 3% while meeting the needs and expectation of our customers. To achieve this, we focused on two things. The first is to earn our allowed returns in both our gas and electric businesses. A key element of this strategy is to earn timely returns on investments and bare steel cast iron replacement and gas infrastructure replacement, as allowed by legislation and regulation.

In addition, we must continue to aggressively control operating cost through such measures as performance management initiatives and strategic sourcing. Finally, we’ll recover lost margins in both our gas and electric territories through approved regulatory mechanisms.

The second focal point of our utility growth strategy is to focus resources on our gas system that will enhance system reliability and public safety. In a few minutes, Jerry, will cover in more detail our expected investments. We are reinvesting earnings to support these investments and have no plans to issue additional equity.

When appropriate modest debt insurances will cover remaining financing needs but we continue to place a high value on maintaining strong internal cash flow generation. On the non-utility side, our goal is to grow earnings 10% annually. To achieve this we expect Infrastructure Services and Energy Services to remain the key drivers of long term growth.

For Infrastructure Services we’ve already seen such exceptional growth that the challenge is to grow from a new higher level of earnings although somewhat less than the record 2012 performance. We of course intend to expand our footprint in this rapidly developing market.

Given our recent track record of success, I’m confident we continue to grow this business the right way, through long term customer relationships and high quality construction and customer service. Energy services on the other hand is very much on the frontend of this growth curve. In the next few years as the business' additional sales people become fully productive and as the geographic footprint expands, we expect to see the returns generated by these investments in our workforce.

For our coal mining business, our focus is on maximizing efficiency and profitability while insuring safety at the mines. Our success in developing demand for the coal at Oaktown 2 will determine the timing of this opening.

And finally, our focus at ProLiance remains on improving long term profitability prospects. As we have witnessed over the past couple of years, the efforts ProLiance has made to reduce its cost structure, especially related to demand cost have led the company toward profitability with continued progress expected in 2013.

And with that I’ll turn over to Jerry who will discuss the various business unit results and our 2013 outlook.

Jerry Benkert

Thanks Carl and good morning. Turning to slide 9, the midpoint of our 2013 Utility net income guidance range is $140 million. The increase over 2012 is driven in large part by additional margin recovery on infrastructure investments, particularly related to our new high voltage transmission line and gas infrastructure investments.

Also, contributing to the year over year increase is lower interest expense which continues to be a positive story for us as we take advantage of refinancing opportunities in what continues to be a favorable interest rate environment. In fact 2013 expected interest expense is only 85% of the 2011 level, while planned investment grew by 7%. As we enter 2013 we will continue to target further re-financings when interest expense savings and opportunities are compelling.

And finally note the O&M line in the table on slide 9. We are continuing to ramp up our competencies as it relates to performance management and strategic sourcing. Initiatives in these areas are paying dividends as evidenced by the sustainable savings estimated at over $7 million in 2012 that helped to offset other cost increases. As the table shows we look to be able to hold controllable O&M costs flat again in 2013.

In summary as a result of these factors, we expect to consolidated utility group to show modest earnings growth over 2012 and to again earn at or near its authorized returns in 2013. From slide 6 that Carl discussed earlier, you can see that with modest growth in 2013, our three year utility earnings growth rate is expected to be between 3% and 4%. On slide 10 we continue the Utility outlook with a review of our forecasted utility CapEx for the next three years. As Carl mentioned earlier, one of our key operating strategies is to reinvest earnings on required infrastructure improvements across our utilities.

As the table in slide 10 demonstrates, we expect to grow rate base primarily through gas system infrastructure replacement investments and acceleration of bare steel cast iron replacement programs. We believe this type of growth in rate base is prudent for many reasons, but clearly the continued reliability of our gas systems is of paramount concern.

Regulators and legislators in both Indiana and Ohio have recognized the importance of these investments in replacing some of our older infrastructure and we believe that the recent as well as pending legislation and regulation will pave the way for timely recovery.

Let's turn to slide 11 where we give some further detail on our key utility investment plans and cost savings initiatives under way. As we've seen here, federal legislation from about a year ago, which arose out of some of the highly publicized incidents such as San Bruno (ph) has driven all gas utilities to further assess the time and scope of their capital maintenance plans.

At Vectren we have determined that our best path forward, especially in an atmosphere of low gas cost is to invest more heavily in the near and medium turn in upgrades to our gas system. Improved hydrostatic testing and in line inspections are just two examples of that.

We also believe now is the time to accelerate our Bare Steel and Cast Iron replacement programs in both Indiana and Ohio. Our replacements programs have been in place and running well for a few years now and so with the accelerated investments we are proposing; I would expect our original 20 year programs to now be accomplished in a total of roughly 12 years. We have more to come on this topic as the year goes on, as we are actively engaged with state regulators and legislators to ensure adequate recovery mechanisms are in place to support our plans.

Switching gears to another key element of our earnings growth strategy, we thought it might be helpful to give a few specific examples of what we're doing in performance management and strategic sourcing since we talked about these areas many times over the past few years.

The examples we list here, changes to post-retirement medical plans providing better choice of plans at a lower cost, changes to the strategy for delivery of field services by taking advantage of technology and modification of our fleet management strategy are meant to cover the breadth of the scope of our cost containment efforts. As I mentioned earlier, we believe we have been very intentional about driving this vision into our culture in Vectren and I think when you look at our nearly flat O&M costs for the past few years, the results bear that out.

Turning to Slide 12, you will see the details of our non-utility guidance. I will go into more detail on each business in few minutes but first let me comment on the most significant driver of our 2013 non-utility guidance. In 2012, in infrastructure services saw incredible growth, as demand for both transmission and distribution work remained high all year.

This record performance was also supported by weather that was extremely favorable for the construction work throughout most of the year. For 2013 we have tempered our guidance to reflect a normal weather year and modestly lower demand, but still we expect a very strong year for our Infrastructure Service and have set the midpoint of our expectations of earnings at $35 million.

Moving on to slide 13, Infrastructure Services and Energy Services continue to be the focus of our nonutility portfolio and will provide most of our future nonutility earnings growth. Infrastructure Services comprised of both Miller Pipeline and Minnesota Limited as projected as I mentioned earlier to have earnings of about $35 million. At December 31, 2012, Infrastructure Services had approximately $380 million of estimated backlog on expected gross revenues of $650 million in 2013.

A few comments on these amounts. First, you should note that we are now quoting gross revenues instead of net revenues. After examining the peers of Infrastructures Services that are publically held, we determined that gross revenues is the metric more in line with industry norms.

Please refer to slide 14, which describes further how we have estimated backlogs for our Infrastructure business. In order to provide some formative perspective, we are providing a 12 month estimated backlog amount. We hope that providing backlog estimates will help investors better understand the business’ potential for a successful year. Since this is our initial attempt at providing backlog for Infrastructure Services business, we will give both a general description of the term backlog and a description of our process for estimating it.

Our infrastructure services backlog represents an estimate of the amount of gross revenue that we expect to realize from work to be performed in the next 12 months. On existing contracts or contracts that we reasonably expect to be renewed or awarded based upon recent history or discussions with customers, we believe our estimates described below are a reasonable basis to estimate backlog but there can be no assurance as the customer’s eventual demand for our services each year.

In order to estimate backlog as of the yearend 2012, we reviewed our various customer relationships and now contracts with our customers are typically structured. We determine that our infrastructure services business operates primarily with two types of contracts, blanket contracts and fixed price contracts.

Blanket contracts are one in which a customer is not contractually committed to specific volumes of service, but where we have been chosen to perform work needed by a customer within a given time frame. Typically blanket contracts are awarded on annual basis. For these contracts, our estimate backlog is based on approximately 80% of 2012 gross revenues for contracts which extend into 2013.

We believe taking 80% is a reasonable approach in order to factor in such unknowns as whether (ph) potential budgetary restriction to customers. As of December 31, 2012 estimated backlog to these blanket contracts was approximately $280 million. It is likely though that additional work will be awarded by these customers as the year progresses.

Moving on to fixed price contracts, these are ones in which the customer has contractually committed to specific service to be performed for a specific price. Our estimate of the backlog on these contracts is simply the remaining value of the contracts that we have been awarded but have not yet been completed.

As of December 31, 2012 backlog for these fixed price contracts was approximately $100 million, but again we would expect additional fixed price contracts to be awarded as the construction season approaches. We believe the key to continued revenue and earnings growth in the pipeline construction business is being prepared to capture the increased demand being projected in both the gas transmission and the distribution markets.

For decades, both Miller and Minnesota Limited have fostered strong customer relationships and built their success on safe, quality construction by a highly skilled work force. These attributes puts us in a great position to grow this business and we expect demand to remain strong in these markets for the foreseeable future, again due to the ageing infrastructure and share related opportunities.

Let’s turn to our Energy Services business with notes on Slide 15. Energy Systems Group is projected to breakeven in 2013. Revenues are expected to remain flat as customers continue to delay performance contracting projects. Also benefits from tax deductions related to energy efficiency projects are expected to be less in 2013 than 2012, because we expect fewer qualifying projects to be completed by the end of ‘13, leading to a decline in expected earnings year-over-year. This tax deduction is expected to expire by the end of 2013 and while there can be no assurance of extension, I can say the industry is focused on efforts to extend them.

We remain committed though to growing both Energy Services segments; performance contracting and renewables. We expect to complete the expansion of our sales force and supporting personnel in 2013, having already grown the sales force by about 40%, since the initiative began in 2010.

They need to replace age back system lighting another equipment only increases with the passage as equipment aging and due to technology advances becoming increasingly inefficient.

In the pace of increasing power cost across the nation over the coming decade, performance contracting projects will be become even more compelling options when customers have to cut energy cost in order to meet tight offering budgets and we believe the market for renewable energy projects will continue to expand as the nation increasingly demands clean energy alternatives.

Moving to the top of slide 16, we’re projecting an approximate $9 million loss from our coal mining operations due to the demand that is still weak but hopefully improving as we move towards 2014. 2013 production is expected to be 5.5 million tons at an expected cost of $43.5 or $35.50 on a cash cost basis with sales of 5.6 million tons at an average price of $43 per ton.

Currently, we have 4.6 million tons sold in 2013 an amount that includes $0.5 million ton that in arbitration related to a price reopener. Our expectation for improvements in cost per ton in 2013 are premised on higher production levels as described primarily at Oaktown 1 leading to more efficient mining operations as well as mining plan changes at prosperity during the year. For example, placing lower profile mining equipment in the prosperity mine should better match the coal seams and reduce the amount of rock being mine with the coal.

Still with the continued thin coal seams another unfavorable mining conditions at prosperity, the cost environment there remains a challenge in 2013. In contrast, we continue to be very pleased with the low cost production levels being achieved at our Oaktown 1 mine which to get only better once we’re able to open our Oaktown 2 mine and spread some shared fix cost over even more ton of production.

Looking ahead, we see growth in tons mined as we’ve already sold 5.8 million tons in 2014 at an average price of $46 per ton. Again, remember this includes $750,000 in arbitration. overall we continue to believe our Illinois base in coal mines are well positioned to capture future sales as the demand recovers.

We expect to see a switch back to coal power plants having higher utilization as natural gas prices are projected to stay above the $3 level. Also, utilities coal stock piles should continue to decline throughout the year as the coal burn increases. This will become an impetus for coal purchasing decisions for 2014 and beyond. With our second Oaktown mine now substantially complete, we're ready to begin production once contracts are signed or is start up at that mine.

Finally, if you turn your attention to the bottom of the slide, we are expecting results at ProLiance to continue to improve and in fact we believe that breakeven at the Vectren level is a reasonable expectation for 2013. There are three primary drivers for this improvement. First, the continued reduction in annual demand cost for transportation and storage contracts should total $13 million less at the ProLiance level. Second, there were significant differences that should occur in the timing of the recognition of revenue related to storage transactions that are driven by among other things the months that the storage is hedged against. Finally ProLiance continues to focus on growing their marketing book and of course last year's very warm winter significantly reduced 2012 margin from this book of business.

Please turn to slide 17 for closing. In summary here this morning we have provided quite a bit of detail around our various businesses and how we expect them to perform in 2013. The quality of our earnings is strong and improving with the lion's share coming from our utility operations that operate in constructive regulatory environments. We have a strong balance sheet with corresponding strong A minus credit ratings. We have a dividend record of consistent increases that few companies can match.

Our non-utility businesses provide enhanced earnings growth opportunities and our business mix continues to improve with the growing contribution from our infrastructure investments. Those are the keys that we believe position us for future success. Although we won't cover them in today's call, I’ll also call your attention to the appendix section of the slides, which as usual contains some of the key metrics for each of our non-utility businesses. We take great pride in being transparent and believe part of that transparency is providing these detailed key metrics on each of our businesses.

Operator that concludes our remarks we're now open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Gaugler from Brean Capital; your line is now open.

Michael Gaugler - Brean Murray, Carret & Co.

I guess my first question would be in the infrastructure services business. Back on slide 8 you were talking about growth in that business in the future. And I'm wondering, given the assets that you have in place there, do you have everything that you want from an operational standpoint? Or would you be looking to do let's say augment organic growth with perhaps a smaller tuck in acquisition for something that you might not have?

Carl Chapman

Michael, its Carl. I think again as you know we have grown this business through like some acquisitions, some small tuck-in's as well as the one large, one at Minnesota Ltd. And we are always open to looking at that but we are also comfortable with organic growth so I would say we really don't have a strategy that's exclusive, we’re really open to both ideas, and we keep our eyes open. Well the key certainly is of course demand, which is drawn. In addition to that it is personnel and equipment and so perhaps acquisition could be a faster way to do that at times. But on the other hand we have also been successful organically growing this business for a number of years. So the bottom line is we are willing to look at both possibilities.

Michael Gaugler - Brean Murray, Carret & Co.

And then also taking a look at the guidance here for the coal mining business. And listening to your comments on cost, I am wondering, is there a point in the future, let's say that, coal end market slowly recovers, and obviously you want to get the business back to breakeven and profitable as quickly as you can. If you look at it and that's kind of the scenario, is there ever a point in time where perhaps you say, look given the efficiencies from opening Oaktown 2 versus Prosperity, maybe you shift production from prosperity that’s the number two, and then use Prosperity for the swing tons as the market recovers.

Carl Chapman

We are always looking at the production levels of the various mines. The real key for us though is that there is a fairly significant sulfur difference in the coal. And we have certain customers that need a bit lower sulfur, we would call it a medium sulfur coal and that is prosperity. Oaktown 2 will be lower than Oaktown 1 but still higher than prosperity so it really is driven by customer need. So we constantly look at this. I think it's a very good question you ask. But the key to it really is what the customer demands is. Obviously over a longer period of time there will be more scrubbers installed and that may change the ability to look at the mix but for right now, it's not as simple as let's get Oaktown 2 open and we will slow down prosperity because of the quality.

Operator

Your next question comes from the line of Sarah Akers from Wells Fargo. Your line is now open.

Sarah Akers - Wells Fargo

A handful of questions on call, first: looking the 5.8 million tons that are sold at $46 and then the 2013 projection for $43 per ton, does that 7% increase so that just reflect higher market prices as coal inventories are assumed to come down, are there any other drivers or market dynamics you could point to that can support that level of uplift in the coal prices?

Carl Chapman

That would be a part of. Also, some models would just be when the contracts we’re entered into and also another big issue would be this quality issue again where there really is some difference in price based upon the quality of the coal. So, we would get into some differences in mix and the requirements of various customers. So that’s really going to be the big driver. I would say in most coal contracts are going to be an inflation if you will, amount in there before you get to the next reopener so it really would be all of those factors together.

Sarah Akers - Wells Fargo

In terms of the 2014 sales, is that your sense that the plant owners still have a lot of their positions to sell out throughout 2013 or do you think that many acted early and locked in those prices for ’14 over the past six to nine months while coal conditions were a bit weak?

Carl Chapman

I think our view would be, in our particular markets they did not act to do a lot of coalmine, we did so as you know quite a bit of coal in the fourth quarter but that really was just because of when contracts were terminating and so it goes without saying I suppose but just the further we get along here, contracts will be terminating from various parties and so we will have opportunities to bid where contracts are up. In addition then as you said, I think we’ll see them, customers start filling in ’14. I really don’t think we saw a lot filling in ’13, simply because all the customers are just concerned about where the level of gas prices will be and what their burn is going to be.

Sarah Akers - Wells Fargo

And then as we think about Oaktown 2, can you give us any sense of what level of sales you would need to see in '14 in order to bring that mine on line, or is it just a matter of kind of the specific customers that would need that quality of coal?

Carl Chapman

It is really going to have to be the specific customers because again what we will see is the customers will have a particular desire on the quality of the coal and it’s really going to be dependent also, then on what prices are at that point. So really can't just say a particular volume, because it will be depended on what the price is and whether we want to open that mine at that point.

Sarah Akers - Wells Fargo

Got it and then one question on ProLiance, the 13 million reduction in demand cost projected for '13 versus '12. Was that level always reflected in the plan according to the scheduled contract expirations? Or does that level reflect kind of recent success in actively reaching out to the counterparties and renegotiating contracts that weren't necessarily set to expire or reopen.

Carl Chapman

I would say the largest portion was always planned but we have been successful in achieving some additional reduction beyond the plan. And that’s actually been the case for about three years. we have been able to beat our number I think pretty much every year that we have been laid out.

Operator

(Operator Instructions) Your next question comes from the line of John Hanson from Presidus, your line is now open.

John Hanson - Presidus

Jerry, thanks for the backlog numbers on the sources business, I appreciate that. Sara, asked most of my questions on coal, but I just want to follow up, just a little bit. Last time we had the tons contracted for 2014 and that’s still the same place that we were last time when you reported, is that right?

Carl Chapman

Yes, I think so. If it’s not, it’s very close.

John Hanson - Presidus

So there is not been activity for '14, as you said still not really developing much yet.

Carl Chapman

Not since we did that in the fourth quarter. on the other hand and of course we announced a big number, and so I don’t know whether that’s too surprising this early in the year.

John Hanson - Presidus

Just a little bit of a technical question, your coal would be given the way environmental stuff is going on now a days, people would be swapping out PRB coal and using your coal?

Carl Chapman

It really depends on the plant. If you were to swap out PRB’s since that’s a lower BTU, you also have to make boiler changes, lot of times what we might be seeing more of is central app, but there have been some PRB, but because of the additional boiler changes that’s a more expensive conversion, but certainly been done.

John Hanson – Presidus

Yes that’s what I’ve thought but I just heard somebody going the other way around which interested me. and just one more question on the coal cost, it’s a little more than what Sarah got into. You mentioned that if you were to open up Oaktown 2 you get to spread some cost out a little bit more. Right now you’ve got Oaktown 2 complete, are we already depreciating all the cost and all the interest cost for Oaktown 2 in the expenses for 2013 or are they still deferred in some way?

Jerry Benkert

Yes John, it is sure standing by pretty ready to go but the interest cost, some of the cost the answer is yes and no I guess. as an example the interest cost is no longer being capitalized so that is being recognized. on the other hand depletion will kick in when we start mining the coal. so some portion of the cost are being recognized at this point.

Operator

Your next question comes from the line of Paul Patterson from Glenrock Associates. Your line is now open.

Paul Patterson - Glenrock Associates

All of my questions have been answered but I just want to touch base on one quick one on. I’m sorry if I missed this, the ProLiance revenue recognition associated with the storage I guess on the timing issue, could you elaborate a little bit on that and how that might turn out next year?

Carl Chapman

Yes as it relates to ’13, the real issue there is of course as we do a comparison to '12, but also is how it might have worked in '12. There's really of couple of things going on. The first one is, just as we might hedge against particular months, and then, if the price is going up or down, we do get some mark-to-market in there at that point. So, really what we have going on is where '12 might have been down just a bit because of some of the hedging done in '11, and then we think that '13 won't have that situation. So, again, it will depend as we hedge against future months, we might hedge against some months in '13 or some months in '14 depending where price is at that time, we can't get some differentials. But I think it's fair to say, Paul, we are pretty comfortable in the approach that we've laid out here for '13. We will see some pick-up from '12, but again, feel pretty comfortable in the way it's laid out.

Paul Patterson - Glenrock Associates

Okay, so then I guess I’m trying to wonder though, do you think a consistent revenue pattern will show up next year? Do you follow me or do you think that we should see a positive or negative associate with next versus this year because of this timing issue?

Carl Chapman

We would expect that the approach for '13 ought to be a fairly consistent approach. The only caution I would give you to that is that, again, if you get a significant run up or down that can have an impact, but we think '13 would be a fairly reasonable approach for going forward.

Paul Patterson - Glenrock Associates

Okay and you guys expect to see another demand reduction is that correct, is it 15 of 9 million or 14, I'm sorry.

Carl Chapman

Well by 15 its 9 million I don't think we’ve disclosed the split between 14 and 15 but by 15 it’s roughly 9 million.

Paul Patterson - Glenrock Associates

Do you think ProLiance may actually be profitable by 15?

Carl Chapman

Well, what we've suggested here is a breakeven approach for '13. Obviously, there are additional demands. We really don't get into predicting out that far. The opportunity is there, but that will depend upon where the marketplace is at that time.

Paul Patterson - Glenrock Associates

Okay. So, it sounds like that would be a big change for the way things have been. So, well, congratulations on having that be able to execute on that. In terms of the Prosperity Mine and the coal seam issue, you mentioned the change in equipment. What's the impact associated with changing out that equipment?

Carl Chapman

Yes, actually there's a couple of things that goes on in Prosperity, and these are all things that we work out or need to work out with MSHA. And the first one is, is that at times we might use a longer bolt in the roof of the mine, and if we use that longer bolt and we're in a thin coal seam, that mining equipment could potentially even run into those bolts. So, by moving in lower profile equipment, then we have the opportunity to make sure that doesn't happen which will improve our productivity. We also have the potential to use different bolts which would be a shorter bolt, which is less costly as well as helps productivity and all of those issues are coordinated with MSHA and we think are real possibilities.

Paul Patterson - Glenrock Associates

And any idea about how much that could save or…

Carl Chapman

We do not have an estimate on that because it really depends on what we work out with MSHA but as we know more we'll certainly describe it.

Operator

(Operator Instructions) your next question comes from the line of Peter [Hart] from Zimmer and Partners, your lines are open.

Unidentified Analyst

I was hoping you could comment on the prospects for passing senate bill 560 in Indiana and how that might affect your capital plans and what the chart you present on slide 10, how that might change if at all.

Carl Chapman

Yes, Peter, Ron Christian who has over external affairs was here with us this morning as always and I am going to let him comment on that.

Ron Christian

Peter Senate Bill 560 actually passed fairly overwhelming out of the Indiana Senate this week and it's now going to the Indiana House, but we are optimistic that that legislation will move through the house and then ultimately be signed into law by the Governor. The effect of that will be in Indiana presently with respect to our bare steel cast iron program we have the ability up to certain prescribed caps to employ deferred accounting for those investments. We also have a low that's already on the books that's referred to a Senate Bill 251 that enables us to recover costs, both for and gas electric activities that are the result of legal requirements and it's our belief that the replacement of bare steel cast iron should fit within the scope of that loss as part of our integrity management program. But beyond that the Senate Bill 560 would capture basically all infrastructure that's approved by the Commission as part of a seven-year capital plan, and so it will just solidify our ratemaking treatment with respect to all of these capital investments that we are making not only for the replacement of bare steel cast iron, but also for our infrastructure replacement generally to comply with pipeline safety laws.

Carl Chapman

Yes Peter may I just sort of emphasize. We have kept pretty good rules in the State of Indiana to work with right now so we are a bit, but almost a minimum we have got the favorable deferrals of and as Ron said where there are governmental mandates we have got legislation already in place allowing tracking. So this is more expenses. I believe if it passes we will track more than we have previously.

Unidentified Analyst

Couple of other things that are now relating to Senate Bill 560, it also provides for the first time in Indiana for rates subject to refund with respect to base rate cases. And secondly it would qualify the ability to use a future test year well out into the future -- today we use a historical test with a12 month adjustment period so we think both those things would be improvements to the regulatory framework we have here which is very constructive.

Carl Chapman

The second part of your question; just say the projecting CapEx and spent on slide number 10, presently, I would say this are current estimates. As Ron says the rules here may be changing just a little bit, may become more expensive for the legislation. We are in progress or will shortly be on discussing these plans with the regulators. So I wouldn’t say passage automatically means the numbers go up although we have plans for that. On the other hand, the projections here may grow a bit or diminish as we discuss these plans with the regulators.

Unidentified Analyst

With respect to deferrals, does it lead to more real time recovery and even basing it on a future test year period, allow you to recover it more timely on a perspective basis, so that from a cash basis, Vectren is a better off?

Jerry Benkert

All of that would be true.

Unidentified Analyst

Would there be a separate line item because I know you have the recovery mechanisms in place and it sounds like you are covered for the most part any way, I just did know if with 560 in place, it allows capture incrementally of more of those CapEx dollars?

Jerry Benkert

Well again Ron gave that example. In Indiana the bare steel paint currently is under a deferral approach and we would expect to seek to put it on not only speed it up but put it under an attractive approach under the existing legislation or it clearly under 560, or something that passes so that’s an example where we would step up the spend as well as the recovery would be sped ahead.

Carl Chapman

Yes and as Jerry said that step up again is accelerated. We are not spending more dollars then we otherwise have been planning, it just that it would be accelerated.

Unidentified Analyst

Then maybe lastly just on the earnings profile for ’13. I know there is a lot of components, a lot of moving pieces but particularly with reference to both coal and ProLiance, going through the quarters throughout ’13, should we anticipate for instance there were some questions on ProLiance where we do have the breakeven but is it where we are going to see, continued losses say for the first half of ’13 similar to what went on the fourth quarter and then those that turn positive in the second half of the ’13 so that net, may be you have a breakeven year but we have shown improvement, you know quarter to quarter or half to half and then similarly for call, looking at say like a $9 million loss, how that might flow through the years so that we can kind of model an anticipate what the profile of the 2013 might look like?

Jerry Benkert

Well, I think a couple of things. One is, as you know, we don't give any quarterly at all. I'll just make a couple of big picture comments. I think on ProLiance the real key there is, it really is driven by the recognition. So, it depends on how we're hedging and that hedging is going to be driven by where the price movements are. So, we are really not in a position to provide quarterly guidance in that regard. On coal it will be driven by the timing of sales and that can be quite variable depending upon when customers want particular volumes even can be tied to, as you know, an outage of a plant or maybe an outage of a delivery, maybe someone working on rail, so in delivery into the plant there can be an outage. So, it can be dependent on that. Then in terms of cost per ton, it's going to be heavily dependent on where we are on production cycle and that also is going to be driven by demand. So, we are really just not in a position to provide any quarterly guidance.

Operator

There are no further questions at this time, Mr. Goocher, I would turn the call back over to you.

Robert Goocher

Thank you operator. We would like to thank everyone for joining us on our call today. On behalf of our entire team, we appreciate your continued interest in Vectren, and invite you to listen to or attend our webcast on Wednesday February 27th, at 12.30 eastern, when we will be presuming to the financial community in New York and further discussing Vectren's business outlook. A link to the webcast could be found on the right hand side of our home page at vectren.com. With that, we'll conclude our call for today. Thanks again for your participation.

Operator

Ladies and gentlemen, this concludes today's conference call. You may disconnect.

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