Good afternoon. My name is Anita and I will be your conference operator today. At this time, I would like to welcome everyone to the Vectren Corporation, fourth quarter 2008 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)
I would now like to turn the call over to Mr. Steve Schein. Mr. Schein you may begin your conference.
Thank you and good afternoon to everyone. On behalf of Vectren we do welcome you to our 2008 earnings call. This call is being webcast and we do have accompanying slides that are available on our website.
I would also like to remind you that some of the statements made on this call will be forward-looking statements. They are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in this presentation. Please refer to our Form 10-K filed today with the Securities and Exchange Commissions which discusses forward-looking statements in more detail.
Joining us today are senior management team, including Niel Ellerbrook, our Chairman and CEO; Carl Chapman, our President and Chief Operating Officer; Jerry Benkert, our CFO; and Ron Christian, General Counsel and Secretary. At the end of our prepared remarks we will have a Q-and-A session and with that I will turn this over to Niel.
Thanks Steve and good afternoon everyone. As is our general practice here, I’m going to make a few fairly high level remarks and then Jerry Benkert and Carl Chapman are going to get into a little bit more detail and then we will certainly invite and expect your questions at the end.
Starting with a real high level look at 2008, we ended the year at $1.65, down from a $1.89 in 2007, slightly improved utility performance, primarily resulting from the indicated base rate increases was more than offset by reduced results from ProLiance and our coal operations and of course the third quarter right down of certain long held commercial real estate investments.
Let’s turn 2009. We have a strong balance sheet, solid credit ratings and plenty of liquidity, all pluses. We announced an increase in our dividend effective December 1. We raised the quarterly dividend to $0.335, that’s a $1.34 annualized, 49th consecutive year of increases and our more current trading levels were yielding 6.1% which we certainly think is a very attractive yield.
We continue to believe that the core businesses provide a solid foundation for long term growth, new rates most recently in Ohio and rate design decoupled tariffs in both of our Indiana gas jurisdictions and significant movement towards straight fixed variable rates. In Ohio the insulators from volume metric, changes in the gas business and we think positioned us very well and we’re attempting to move towards similar rate design in the electric business in Indiana.
New coal mining contracts in 2009, representing about 78% of production we think will lead to significantly improved performance in that business and then of course we expect increased production in ‘09, ‘10, ‘11 as our Oaktown Mines come online and I think we’ll have more information for you on that later in the call.
We’re real optimistic long term, about both the infrastructure business and also energy efficiency and renewables. Of course Miller’s in the infrastructure business, Energy Systems Group. In the efficiency and renewables business, both of those businesses stand to benefit fairly significantly from the new stimulus bill and we’ll share that information with you.
Now, let’s sort of turn to maybe a more current look at 2009 and let me also tell you, as is always the case, we try to be as transparent with you all as we can and share the good news and the bad. All of the information that we share with you, as we talk a little bit about the economy is in our forecast or guidance. So we think we’ve got a handle on it, but we also recognize that the things are rapidly changing.
Certainly, the downturn in the economy is very uncertain, significantly challenging. We have large volume customers, automotive plastics and ethanol standout. 27% of our electric margins, excluding the wholesale margins come from the industrial sector and of that, about half from five large electric customers and again we’ve considered their economic situation. I think we’ve considered it, but one should understand the margin that we get from the large customers.
Ethanol opportunities maybe limited; although, we are perhaps slightly more optimistic about that business with these new lower levels of gas commodity costs. As we look at the gas business, only 12% of our margin comes from the industrial sector, so we’re certainly not as vulnerable to industrial decline and that’s part of the business.
We do see some tampered growth and significant conservation by hurricane back to the rate design that we’ve got in the gas business, which we think protects us from most all of that. We will see some increase in bad debts. We get regulatory protection in Ohio and in Indiana. Some regulatory help, although we still have some exposure to bad debt.
Again in our forecast we see our customer account remaining relatively flat year-over-year. The infrastructure businesses have to be adversely effected as we see significant reductions in construction programs starting to evidenced and so, we’ve heard a lot about the pension funding challenges. In our case we see additional funding in the $25 million to $30 million range and expense of $10 million versus $6.5 million in 2008.
Again in the forecast, this is obviously not a business as usual situation. We’ve tried to respond by taking what we think is a reasonably significant action. We have frozen wages for all Vectren officers. We are limiting wage increases for exempt employees. We are limiting hiring and replacement employees; only in the most necessary situations will we proceed to add people to the payroll.
Discretionary OEM we see as being flat year-over-year, exclusive of those costs where we get margin recovery, so the costs will actually hit the bottom line. We see flat year-over-year and that includes the pension expense and the bad debt expense we may see that I mentioned above.
We have reduced our 2009 and 2010 CapEx plans by a total of $60 million. Those dollars will probably be only spent in 2011 and beyond, but represent fairly significant reductions and actually relate back to the infrastructure demand that I mentioned. Suffice to say that the uncertainties of this environment are creating, I think a significant challenge to reliably predict 2009 result, but we think that the range that we provided, which is a little bit wider than normal accommodates that uncertainty.
The next page, I think there is a real good job of reconciling for you. 2008 results to expected mid point of our 2009 guidance. I’d also like to point out the dotted line that appears near the top, simply to say that wherein not for the economy and the difficulties we associate with it, we certainly think we would have seen very extraordinary earnings growth. That number would have been two or three at least on this schedule, but we’ve also tried to be realistic about the economy.
I think that the bottom line in our story is that the significant improvements in the coal operations. You see $0.36 on this page are going to be tempered by the implications of the economy. We’re attributing about $0.22 to the utility operations; nevertheless the net of those two will still allow us to show reasonably significant earnings growth in 2009. So all-in-all we’re expecting a good year, although we’ve recognize the economy has tempered our expectations somewhat.
With that I’m going to stop and turn it over to Mr. Benkert.
Thanks Niel. Let me give just a little bit more color and a little bit more discussion of 2008, but then quickly turning towards 2009 and Carl will continue on that same thing, so.
On slide seven you can see the overall results just broken down by the groups, both in earnings and also earnings per share and I think Niel has really covered the highlight here pretty well. So the only other thing I’d note on this page is that average shares outstanding have grown. We had sold equity at an earlier day, under pretty favorable conditions. Mid year this year we pulled down the equity forward, the roughly $4.6 million shares. So it’s nice to have that in the balance sheet, have the cash on hand, but it’s also an increase in our share account here as it works its way in.
On slide eight, just a quickly look at the year-over-year from the utility perspective. I agree with Niel’s comments that I think we feel pretty good about the utility earnings overall, the finish and when we’re talking about the earnings in ’07 that stepped up to $1.40 or ’08 to $1.42, I think as we move into the $1.40s, that’s pretty close to the potential from our utility business and the reason we hit those sort of numbers suddenly, are the various rate cases that we put in place, many of which benefit in 2008.
If I simply tried to run some estimates off year end investments and equity and try to just talk about what is it possible to produce out of the utility business; if you’re thinking about returns in the 10% plus range. I’d say if also cylinders are firing, that’s a $1.45 to $1.50; just to give you a sort of long term ballpark at this time.
So, pretty descent result in ’08. Certainly we had some additional spending, you can see that on the O&M line and some of that and we call it out, the $4.4 million for additional spending here that showed up primarily in the fourth quarter. We took the opportunity in a fairly strong utility year to pick up some additional needed expenditures on the operating side around maintenance that could be efficiently done and that would also help relieve a little bit of pressure off of what we first saw to be more difficult times coming in ’09 and ’10 as an example. So those are highlights on the utility side.
If you turn the slide nine; overall non-utility year-over-year I think you’ll see in cents per share, the impact to coal mining and ProLiance, as well as that impairment charge that Niel spoke to earlier. I’ll tell you that the Carl’s going to turn the attention very quickly from this year which was impacted by the cost, and the higher cost driven by IMSHA, to next year and there after which really gets focused on the opportunity to realized the higher pricing that’s in the market. So, that will certainly be the coal mining discussion.
Let me call out one last thing. The infrastructure businesses which are shown here to have improved $2 million year-over-year really have performed very nicely. So, if you look at ’07 and ’08, they actually earned combined $11.4 million in 2008. They were very happy to see those businesses showing up and contributing nicely.
Moving to slide 10 then, just to spend a bit of time talking in a little bit more detail about the ’09 outlook for the utility; you can see here we are tempering guidance somewhat from ’07, ’08 earnings and from what I said the potential was, but again this is a modest reduction. We see reduction not literally flat and that’s the result of this very difficult economy.
I do want to reiterate the same point Niel made; longer term and even now our utilities are very well positioned given the right cases we put in place and are above average set of regulatory mechanisms; but having said that let’s spend a little bit more time on the economy.
We reduced our budget by roughly $20 million as to the recession and this is in the margin area that I’m speaking of, and those reduction certainly to a great extent, relative to large customers, to much lesser extent around the residential and small commercial customers given the favorable rate making in those areas that allow us to pursue conservation, but large customers have an impact more so on the electric than the gas. We reduce ethanol margin, and the wholesale power marketing sales of excess power on the electric side have been reduced.
I know the economy is of some interest and we’ve had questions. I’d like to make a few more comments to see if we can cover off on some of that. On the gas side as Niel commented, overall large customer margins are down in the 12% range of total margin. So, we are less vulnerable there.
Even at that, we tend to be higher levels of heat sensitive load versus process load and so for those reasons our issues are likely going to show up more significantly on the electric side, where as Niel also noted we have 27% or roughly a quarter of overall retail and firm electric margins coming out of the large sector.
Our top five customers are involved in plastics, automotive and that’s primarily Toyota, chemicals and refining, and if I took one as an example, and each of these companies are in our service territory and we believe we’ll remain here and operate and run. So, we certainly projected what we see, but having said that I just wanted to point them out.
Toyota has been in the new some, just as other automotive manufacturers have and just to outline a little bit of that, they have cutback on some production and produced some fairly large vehicles here, but the Tundra truck is being shifted out of Indiana and replaced by the Highlander as the year goes on.
They have had to cutback some on production, but they’re keeping their employees employed and since they curtailed to a 72 hour work week and over the last two years we have taken into account some of this and between ’07 and ’09, reduced the load that we’re counting on fairly significantly in the budget as an example.
If you wind to and we’re interested in just our industry split. Overall as a percentage of large customers, were roughly 40% involved in plastics or 40% of our margins are coming out of plastics. The level of automotive is 10% overall, food at 8%, chemicals at 8% and the categories go down from there, so that’s just an overall split.
I would say that the large budget overall, we reduced by about 5% from 2008, taking into account for recession as we see it. The ethanol budget, we reduced to less than $1 million.
Now in 2008 it was $3 million. Looking forward it actually has a potential beyond that. There are some additional plans being developed. Although the development has slowed somewhat in this economy, Niel spoke to opportunity, that’s how ethanol would be because at this point we’ve reduced that enough; it’s really not much risk.
If the question was around our largest plant closings and their impact on margins that would really be an ethanol story also. It’s not that we haven’t had any plant closings, but other than ethanol the margin impact has been fairly slight.
We were trying to respond to your question about future plant closings; that are possible, but we might be able to foresee or have signs of it at this time. I would say that list does not amount to anything significant to margin at this time. Wholesale power marketing and the budget we reduced after sharing, net of sharing to a level of $14 million for 2009. Having said that and that’s a significant reduction, it’s possible that there’s some additional downside to that; we’ll see at the year goes on.
So, those are highlights and hopefully that’s some additional help on trying to understand what we’ve done and we what we see for margin as we look forward. Then later in the slide deck, Carl will share some information on just the overall businesses and what additional opportunity or downside we see just as a matter of fact. So with that, I’ll move onto O&M expense and just reiterate what Niel commented on.
O&M year-over-year, from ’08 it had ramped up some with additional reliability expenditures. From ’08 to ’09 it is held flat, other than some tracked expenses and the example of that would be the Warrick Scrubber operations coming online. That will take place and certainly come into the ’09 year with attractive margins.
Likewise, we’re hopeful that we’ll have electric DSM later in the year and if we do, it’ll have program cost, those costs would be tracked through and that’s in our budget and integrity management was amortized after the last rate case, that begin in October of last year, so full-year. Other than those specific couple tracked expenses, then our cost control efforts have offset the increased bad debt expense, the increased pension expense and other items that are described on this page.
Depreciation is up 9% year-over-year per plant placed in service, but that percentage is a bit higher than it otherwise would. $5 million of the increase is also related to depreciation on the Warrick plant, those scrubbers are put in place; but again with the rate making in Indiana, those dollars are recovered through margin. Interest expenses of 7% and an effective rate pretty similar to the past of 38%.
So those are highlights on the utility side. Carl.
Thanks, Jerry and I think if we really get in and look at slide 11, looking at the non-utility, we’ll spend our time I think really just going immediately to the details slides. This will give you a nice summary, so that you can see that the guidance is at $0.40 to $0.60 here and you can see the historical 2007 and 2008, but I think we’ll just moved straight to the additional slide.
I do want to comment that the metrics are being provided as always on slide 23 and 24. So, as we talk about each of these businesses, you can look at those slides to get a sense of what the real drivers are for each of the businesses.
Turning to slide 12, which is about ProLiance, I think you can see that the results for the last three calendar years are pretty comparable recognizing that 2008 includes an estimate for the FERC penalty related to shipper must-have title issues that we discussed previously. I would say also that we do have additional procedures in place to ensure compliance going forward.
We also are going to be growing our storage by about 5 Bcf to 47 Bcf due to the Liberty contract which I’ll talk more about in a second. However, our 2009 budget is lower, recall that storage optimization is the primary driver for ProLiance’s earnings and we did see lower seasonal spreads for the first quarter of 2009.
Those of course were generally locked in, many of them in 2008 and we did see lower spreads, but our current view right now is for wider spreads for the fourth quarter of ’09 than we have in the budget, which could provide upside if those spreads continue. Again that has been there for a few months or a couple of months and so if that continues there could be upside versus what we budgeted.
We’ve also not budgeted any large cash to NYMEX like it occurred in the third quarter of 2008, but again ProLiance is very well positioned to take advantage of storage congestion that’s starting to look like may well occur from the high production that’s continuing even with the cutbacks in drilling, but also from the low demand from downturn. So, again we think the storage congestion may well provide good opportunities for ProLiance on cash to NYMEX later in the year.
Turning to slide 13, it’s just very quickly on the liberty investment. I’ll remind you that’s a 25% joint venture with Sempra called Liberty Gas Storage. ProLiance is an investor. It’s about a 35 Bcf capacity salt dome at two different sites in Louisiana and ProLiance’s share of the investment at year end is about $50 million. We also have a contract at ProLiance for 5 Bcf of the capacity.
We discussed in the third quarter last year, that there have been delays due to sub surface problems and corrective measures are well underway and we do expect them to be successful. However, if they are not successful, we’re just disclosing that the Vectren share of impairment would be a max of $21 million pretax. We don’t see that as a material effect on ProLiance or Vectren’s liquidity, but of course it could be material to net income in anyone period and we’ll know more later in the year, if those corrective measures are working
Turning to slide 14 on Coal Mining; we did operate at a loss in 2008 that Jerry had mentioned. I just would comment really three things that drove that and then we’ll talk about the more important, which is what drives 2009.
M-share continued to have changing requirements on seals in 2007 and roofing in 2008, which really drove the prosperity to have a completely different mining plan and put us in less productive areas in 2008, and that’s a big part of what happened in our results.
We also had low BTU at the surface mine, which required us to blend a higher cost product, to blend up the BTU and of course you’re well aware of diesel fuel cost during the earlier part of 2008; but for 2009 looking forward, the Oaktown Mines are on schedule which should be on coal in the second quarter of ’09 for the first mine and the fourth quarter of 10 for the second mine.
The ramp up of the coal with the new mines opened then were from 4 million tons approximately in 2008, to a mid point of a little less than 5 million tons in 2009 to 8 million tons in 2011. 90% of our coal is priced in 2009 and 70% in 2010. We also had over 70% of our 2009 production was repriced on January 1 at substantially higher prices. We do have one legacy contract remaining, but again 70% of our production at the higher prices.
We’re confirming what we said last quarter about coal. We think $8 to $12 per ton pre tax margin; $2 to $3 per ton pre tax overheads including interest and corporate allocations and we do expect that we budgeted the cost of ton a bit conservative, but we think that’s appropriate until actual mining begins at Oaktown and a revised mining plan is implemented further at Prosperity and we’ll see how that unfolds over the next few months.
As you think about quarterly earnings, I’ll just remind you that the margin per ton is budgeted to improve throughout the year; of course due to the lower cost and then the higher revenue per ton that will occur once the Oaktown tons are in place.
Turning to slide 15 on Miller Pipeline; Miller basically matched 2007 record earnings. 2007 had several large transmission projects which didn’t recur in 2008 and we also completed two small acquisitions, helping us to continue our geographic expansion and while we continue to believe Miller’s positioned very well for long term growth, we have budgeted 2009 to be a bit of a tougher year.
Niel mentioned capital constraints from some of the utility customers including Vectren and also we think competition for fewer projects that will result from those capital constraints will likely reduce the margin percentages.
However, two factors really caused us to look at the future at very differently than we look at 2009. Many of these bare steel, cast iron projects have specific regulatory support and when the credit markets turn, these expenditures should be some of the first projects the utilities will be funding. Our utilities are included in these customers who have made these cuts as I mentioned and as an example will revaluate as the economy and capital markets rebound.
The stimulus bill includes about $30 billion for highway infrastructure and community improvement projects and many of these project will record relocation of pipes or infrastructure builds like wastewater and water pipes. We think these dollars coupled with the bonus depreciation that utilities will be looking at, should all drive additional project for Miller.
While those factors really are not at all considered in our 2009 budget, depending on how fast the stimulus bill in the capital markets rebound or could be even some opportunity for Miller in 2009, in addition to the long term positive impacts from all those issues.
Slide 16 also talks about our other Energy Infrastructure Company. Energy Systems Group had record earnings in 2008, continuing strong growth as you can see from the earnings over the last three years, as customers continue to focus on energy efficiency and sustainability.
We think we’re setup well for 2009 with $50 million of new contracts in fourth quarter of 2008, as well as Energy Efficient Commercial Building tax deductions getting extended through 2013. Still we’ve been cautious in our budget due to possible capital constrains and economic downturns impacting our customers releasing projects.
However, the backlog is up $13 million or 25%. We think the stimulus bill as likely to inject about $20 billion into the Energy Efficiency market, which is only a $5 billion a year market to start with.
We could see some delay in project as customers compete for the stimulus dollar. In the longer term again, the market should be on a path for a very large growth rate. We’ve grow significantly over the past four years we think, demonstrating our ability to manage the growth.
The focus on renewable continues as well. Our first was the completion of the three megawatt Blackfoot landfill project here in southwestern Indiana, at landfill gas to power. The Indiana commission approved the sale of that project to Vectren South yesterday and that sales should occur after some final due diligence by Vectren South. We’re selling the power to the utility until the sale of the project is finalized.
Again renewables opportunities are probably obvious, but they’re now even greater. The federal stimulus bill includes about $6 billion of loan guarantees in this area. States continue to pass renewable requirements and both the Senate and the House are discussing possible federal renewable mandates. All of those are to impact the market for renewables going forward.
Slide 17 and 19 Jerry mentioned earlier, we just tried to give you a quick look at the net income sensitivity and risk for both the utility and non-utility results. Slide 17 is the summary of each company of what we current see as the possible range of earnings, based on the detail of risk on the next two slides, as well as the comments that Jerry and I have made previously.
Well, I won’t go into any detail of the risk analysis and since most are self-explanatory, I will make just a few summary comments. Of course, these comments should be taken in context of Niel’s earlier comment on just how difficult it is to estimate results in this environment.
On slide 18, you can see the utility risk or balance somewhat toward the downsize, partially due to the difficult environment that’s continuing for many of our manufacturing customers that Jerry talked about. We’ve also seen a large decrease in MISO prices recently that could drive our wholesale power marketing margins a bit lower.
On slide 19, you can see the non-utility risk, on the other hand are tilted to the upside, partially due to the possible upside. It could occur at ProLiance from the seasonal spreads that I mentioned, if they should continue, as well as what storage congestion could provide the cash to NYMEX opportunities. We also as I mentioned think coal cost per ton should be less than budgeted, but again until we’re on coal at Oaktown and are further implementing our prosperity mine plan, we think that estimate is the best at this time.
Finally, turning to slide 20 and I won’t go through all these investment highlights, but we think they’re strong, but I would like to just comment on a few themes that I hope you’ve heard loud and clear from all of our comments. First of all, we’re focused on de-risking the regulated business and we think our regulatory design and rate design demonstrate the risky.
We’ve got strong credit ratings and we can access capital markets as their available because of that, and could restore some of the utility spending as capital markets allow. We got a sustainable dividend growth as mentioned by our 49 year track record and I think also while 2009 is a challenging environment, we still expect nice EPS growth and further, our long term at both utility and non-utility businesses, we see very good growth opportunities and we’ve mentioned a few of those here.
With that operator, I’ll turn it back to you for questions.
(Operator Instructions) Your first question comes from the line of Faisel Khan of City. Sir, your line is open.
Barry Haimes – City
This is actually Barry Haimes. I had a few questions, sorry if I jump around a little bit. At the utilities, why won’t the volume declines get captured in decoupling, does it not include industrial customers or is it mostly at the electric utility or what’s the reason behind that?
Yes, you’re right on track. It’s actually at the residential coal small customer level and it’s on the gas side right now. So we’ve got it and we have decoupling mechanisms in Indiana that pick up those two classes of customers, but not the industrial.
In Ohio, we’ve gone away from decoupling now with this most recent rate order to a straight fixed variable design that’s going to be phased in over the next the 12 months from a partial to full and once that’s in placed then those small customers classes would have a monthly bill that did not change overtime and that captures the margin and so that accomplishes the same thing.
It protects for usage decline, it would also protect from weather, but when we don’t have it, it does not pertain to the large classes and right now we don’t have it on the electric side at all, although we’re well down the road we believe. So, it’s working towards decoupling on the electric side with hearing scheduled for next week and there has been a little collaborative process on that subject.
Yes, Barry I think the bottom line is that the economic implications that we’re trying to forecast are outside of what our tariff designs protect. So, that would be the large industrials, a little bit a bad debt, some ethanol loss, some things that we described.
Barry Haimes - City
I got you, and from the perspective of the electric utility, what type of usage declines are you anticipating?
I think overall on the eclectic side and these estimates continue to move, but I’d say for a big picture look that generally the usage is flat in the smaller customer levels.
Well, but explain to him what sort of a decline we have forecast that leads us to the margin decline that we have provided in the numbers.
I guess looking a little closer; in 2009, we’ve got overall decline to residential, commercial, probably around the 2.5, just slightly over that level and so that certainly builds into margin decline. Now, we have the opportunity perhaps to capture some of that through decoupling if that comes down the pipe Barry and so that’s one of the items that showed up on the utility risk slide that Carl mentioned earlier, that’s included in our deck.
Barry Haimes - City
I guess electric, I don’t know if you want to; if you’re not going to disclose it that’s fine, but at the electric utility what type of volume decline and what percentage are you expecting for the industrial customers.
Well, to the earlier question, from a margin standpoint, I’m not sure I have a readily available on usage, but there was the margin impact, we had said it was roughly 5% at the large customer level.
Barry Haimes - City
Okay, moving over to coal mining segment, the prices are up quite a bit as a result of your contracts, but costs are going up a significant amount also. What’s the cause of that? I thought all of that stuff already should have been priced in towards the end of the year and in the third and fourth quarter? What’s causing the up tick expenses going into 2009, I guess?
Barry, this is Carl. Again as I mentioned earlier, until we see our prosperity revised mining plan implemented a bit further and actually get on coal at Oaktown, which is not until the second quarter, we have forecasted the cost to be a bit higher and again as I mentioned, we hope that that is a conservative estimate and on the risk slide we’ve suggested that it could well be, but until we’re on coal and we see some more improvement and prosperity, we think it’s the best estimate to make at this time.
Barry Haimes - City
I think I missed it, but I think you mentioned, what portion of coal is contracted over the next few years?
Basically 90% of what we expect in 2009 is priced and 70% is priced for 2010. Now again we have contracts that run longer than prices, but the re-openers are there for the contract. So again 90% for ’09, 70% for ’10.
Carl just to add that to a little bit, in ’09 of the 90%, 70% is newly priced and sort of in that bucket that we call higher prices, correct?
Barry Haimes - City
Yes, so if you were to take our mid point that we have in our metrics, which I think is 4.9, we’re suggesting again the 70% of that has been priced effective January 1 at the higher prices.
Barry Haimes – City
I’ll jump off and jump back on. I have a few more questions, but I’ll let some other people get on first.
Your next question comes from Greg McGowan of Sidoti & Company; your line is open sir.
Greg McGowan - Sidoti & Company
Hello, good afternoon everybody.
Greg McGowan - Sidoti & Company
While I’m thinking about the higher cost per ton at coal for just the fourth quarter, is that really related to the fact that you have to blend to boost the BTU count? Is that what we’re looking at for the fourth quarter and is that a reasonable why you might be looking for the higher cost in the 2009 for coal mining?
Yes, actually when we look at the cost for coal mining I think that that did effect the fourth quarter and we’ll have some of that continuing at our surface mine in 2009, but again what we’ve done is in the metrics on slide 23. Actually our cost of sales in the fourth quarter was $39.13.
We think that’s higher than it should be, but some of the blending was there and then as we reconfigure the prosperity mine, its very expensive to do that, because it causes some downtime as it relates to production and so as we reconfigure that mine, it does have higher costs. As we get further into the reconfiguration of that mine, then the cost per ton will drop and of course the Oaktown cost per ton will drop as we get closer and closer to full production at that mine. Early on the cost per ton would obviously be higher.
Greg McGowan - Sidoti & Company
Okay, so if I’m hearing this correctly it really sounds like the profit per ton is really cut back and loaded, not necessarily to a major extent, but it does relate to some extent given the fact that the Oaktown is a lower cost per ton mine, right?
Yes, once its closer to full production and it’s a lower cost mine and then of course we also have the additional tons coming out of Oaktown. So, the fourth quarter tonnage is going to be greater obviously, than the first quarter tonnage as an example.
Greg McGowan - Sidoti & Company
Okay, and looking at ProLiance, that’s a business that’s kind of changed over the past 18 months and maybe you can talk about how you’re managing this business going forward in terms of taking advantage of seasonable spreads versus the shorter term cash NYMEX spreads?
Sure. Obviously, what we look at is a balance as to what will give us the best value for our shareholder, but I think the real issue is that in 2008, what we saw with a lot of volatility in price; let’s face it all the way from 13 down to 450 or whatever, or even four; so there’s a lot of volatility, but it was very flat month-to-month and so the months were moving together and that meant there wasn’t much seasonal spread. So, we didn’t have the opportunity for a lot of seasonal spread.
What we’ve seen since then, and as I mentioned not really considered in our budget, is we have started to see the fourth quarter of 2009, we’re seeing that spread start to open back up, but again through 2008 and that’s when we were locked in, our first quarter of 2009, there just wasn’t much opportunity.
Greg McGowan - Sidoti & Company
Okay and finally on the utility side, you’re seeking decoupling for the electric part of your business and I was wondering if you are going to share with us how the preliminary conversations have been going with the regulators?
Gregg, its Jerry. Those conversations I think have gone pretty well I would say. We can’t really get deeply into settlement conversations, but I think decoupling generally is supported in the state energy and conservation and the Governor’s Office is still developing additional programs of his own that are focused on efficiencies, so I think there is a lot of momentum.
Part of the issues in the state is just that there is a different approach as we go at it. I don’t think the theme in the message is much as different utilities have filings on and it’s partly a question of whether those eventually are proved and in our case improved on our model for us or whether they become a bit more generic, but I clearly think it will come, it’s just a matter of time.
Greg McGowan - Sidoti & Company
Okay, thank you very much.
(Operator Instructions) Your next question comes from the line of Faisel Khan of Citi. Your line is opened sir.
Barry Haimes - Citi
Hey, it’s Barry again. The storage capacity at ProLiance is going up to 40; I guess you were talking about getting it up to 47 with the Liberty Storage. At what point in the year do you expect that to come online?
We don’t have an exact date yet, and again it’s all tied to obviously the fix of Liberty, but what we would see it is well into the year by the time that we have access to that.
Barry Haimes - Citi
Your next question comes from the line of Michael Creager of Thompson, Siegel. Your line is opened.
Michael Creager - Thompson, Siegel
Good afternoon. On the electric utility, regarding the guidance for the industrial class margin being down 5% in 2009, how much was it down in the fourth quarter?
Michael, I don’t think we have that information sort of at our fingertips here.
Michael Creager - Thompson, Siegel
So are you basing that guidance for 2009, based on what you saw on the fourth quarter, or how things are trending so far in 2009 or what’s that sort of based on?
It’s certainly based on how things are going. We’ve got industrial reps on the ground as you might expect; that continuing dialogue regularly with our customers, so it’s certainly a feedback from those direct contacts as well as anything else we might pickup on.
So, it’s a combination of what we’ve already seen and then the intelligence that we’ve gathered through direct conversation with the customers, who obviously are just trying to forecast what they’re seeing and what production levels they see and so at the end of the day, it’s sort of a best guess.
Michael Creager - Thompson, Siegel
If you get decoupling at the electric utility, would that also apply just to the Verizon commercial customers.
Yes, that’s correct
Michael Creager - Thompson, Siegel
Okay and then also on ProLiance, given where the curve is now, sort of in steep contango, what’s the reason for not budgeting some of that, what should be sort of an attractive opportunity for your storage assets? Why not put some of that in your budget at this point?
We actually have put some of it in our budget at this point, but again what we’ve got, of course a lot of it is, a lot of our earning situation is driven here by the first quarter where an awful lot of our opportunity is and that’s already locked in 2008. So, we have put some in our budget and we’ll continue to put more and we are looking at it closely to see, if we should stepped up even more.
Michael Creager - Thompson, Siegel
Okay, thank you.
(Operator Instructions) Mr. Schein, there are no further questions at this time. I would like to turn the call back over to you for any closing remarks.
Thank you. First of all, we would like to thank all of you for your participation on this call and second, I want to make sure that everyone knows we look forward to opportunities to further discuss our story. We will be out in Boston and New York in early March and hope those out there can join us. Operator that concludes our call.
Thank you, sir. Ladies and gentlemen you may now disconnect your lines.
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