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Vectren Corp (NYSE:VVC)

Financial Community Presentation

February 27, 2013 12:30 pm ET

Executives

Carl L. Chapman - Chairman of the Board, Chief Executive Officer and President

Robert L. Goocher - Vice President of Investor Relations and Treasurer

Carl L. Chapman

Good afternoon, and thanks for being here. We really appreciate it, particularly on a rainy day, or at least it was rainy. So thank you so much. I just would mention to you quickly, my name is Carl Chapman. I'm the CEO and Chairman of Vectren Corporation. I have with me Robert Goocher, who's our Vice President, Investor Relations and our Treasurer; and Aaron Musgrave, who is our Director of Investor Relations. So again, we appreciate you being here so much.

I would mention, a number of you know Jerry Benkert, so I want to mention that Jerry started feeling ill on Monday, and just decided it'd be best not to make the trip. So again, he'll be with us, I'm sure next time, but I do want to mention why he's not here and Robert and I will actually split up our discussion today.

And again, what I was hoping to do today, Indiana is a basketball town. I'm not sure -- or state, I'm not sure you all are basketball fans, but I was hoping to come in here and brag about how we're #1, and how great that is, but unfortunately, they lost last night. So I'll still say they're a good team, but it's not quite as good as perhaps we were hoping for, but it is a basketball state, and so it's a lot of fun to watch a team when it is as good as they are.

We obviously have our forward-looking statements on Slide 3, and I'll just call your attention to that, that many of the things that we talk about today obviously will be forward-looking statements and of course, refer you to our 10-K, which was filed a week or so ago.

Most of you know Vectren, so I'm not going to spend a lot of time here, but I do want to just mention a few key items.

First of all, we do target a total shareholder return of 8% to 10%, coming from 2 pieces, and that's our consolidated earnings growth rate of 4% to 5% and also our dividend yield, which is roughly 4.3%. So focused on that 8% to 10%. That growth rate of 4% to 5% is made up of 3% at the Utility, and then also 10% at our total Nonutility look.

That target payout ratio of 65% with our dividend, primarily supported by the Utility earnings at 75%. And I'd also mention, of course, that we are in our 53rd consecutive year of increased dividends, and so a great record there for you to also think about.

We are primarily a utility, about 80% to 90%. And we don't see that changing, coming from the utility. About $2.6 billion of rate base. We'll give you some detail on that in a second. We're in Indiana and Ohio. We view those as constructive states on regulation. I realize there's some noise around Ohio related to electric deregulation, but we're only in the gas business in Ohio. We do have electric in Indiana, but only gas in Ohio. And so I'll just mention, we think we're in constructive regulatory environments for both states.

We are focused on earning our allowed returns and that is a proven ability. And going forward, we'll look at this in some detail. We think, going forward, it's really about our gas infrastructure investments on the Utility side driving so much of our future earnings growth, and we'll go into some detail there.

We've also shared for quite some time our focus on non-reg, it's all about Infrastructure Services and Energy Services, and how we grow those 2 businesses. And we do have a very strong balance sheet, A- at S&P, AAA at Moody's, and we are very focused on our ratings.

We just, very quickly, sort of look at Vectren at a glance. A big picture look here, and Robert will get into some detail on the Nonutility businesses in a moment. We have 4 utilities, about 1 million gas customers, 1 electric utility, 3 gas, about 140,000 on the electric. The earnings, though, as you saw on the prior slide, is about 50-50 roughly, and again, we're a bit different in that regard even though we have 1 million gas and 140,000 electric. We own our own generation, so our earnings split is more close or closer to 50-50, and that makes us a bit different.

Also on Slide 5, our Nonutility businesses and Robert will cover in detail, just say that infrastructure is all about underground construction. Energy Services is about performance contracting, meaning that we guarantee that the equipment we install will be paid for through the savings.

Coal Mining, we sell to Vectren, but also third party, a lot more to third party than Vectren, and we have 2 mines that are running and a third one that is basically ready to run at this point. And we'll talk about that, Robert will, about demand and what we're expecting. And then we have a wholesale marketing business called ProLiance Energy, which again, Robert will get into, our focus there and how we're returning that to profitability.

Turning to Slide 6, just to lay out what are our big picture strategies, and we'll talk about both Utility and Nonutility here. I already mentioned that our target is a 3% earnings growth rate. Want to earn our allowed returns, and our focus there is really because we have support on a number of initiatives through legislation and regulation that allows us to track certain cost and returns and we'll look at that in detail on Slide 12 in a moment.

Performance management, helping us control operating cost. I'll show you in a second that with our estimate for 2013, it would be 3 years of flat O&M, and we would expect to continue that for a while. We do have lost margin recovery on the electric side and decoupling or straight fix variable on gas.

And we got a whole chart on Page 12 that actually lays out all of the various mechanisms in place.

The infrastructure replacement is really about enhancing reliability and safety. We will have some acceleration there. It's not spending more money than we otherwise would, but we'll accelerate and we'll look at that in some detail. We have no planned equity offerings in our forecast period. We will have some external debt financing because of the spend on gas infrastructure. But we think, again, our balance sheet will be just fine with that additional debt financing.

On the Nonutility side, we target the 10% earnings growth that I mentioned. That's focusing on Infrastructure Services. We've got a premier business there that's growing very nicely. Robert will get into the detail, but it's really about aging, replacing aging infrastructure and adding pipe for the shale in various places. But we'll get into quite a bit of detail on that. We want to expand that footprint. We've done that. And we can do that through acquisition to some extent, but more likely, adding people, and we've been doing that and been working very well and you'll see some details.

On the Energy Services, we're adding people, so that we can expand our footprint. We think now is a good time, even though it is a difficult time for that business, because the municipal customers have a tough time spending money right now, given their budgets. But we think long term is going to be strong, and so we see expanding the geographic footprint.

We also do landfill properties, both to power and to gas.

We'll open Oaktown 2 coal mine as the demand dictates. The other 2 mines, one's been running for about 12 years, the other one for 3, and Oaktown 2 will open as we have demand. Eventually, we'd be at 7.5 million tons, and then we've been focused on ProLiance's profitability. Back in the appendix, you'll actually see how we declined the storage and pipeline transportation demand charges.

Turning to Slide 7, just a quick overview, where will we spend our time. We want to spend our time on consistent earnings growth. Our utility gas infrastructure investments, why Infrastructure Services and Energy Services can grow, and then also, where is Illinois Basin coal going since we have the mine that can be opened once the demand is there.

If we look at Slide 8. We'll just very quickly talk about 2012. I know you're more focused on the future, so we won't spend too much time here. I just want to say again, we think it was an outstanding year at $1.94. That contrasts to $1.73 in '11 and $1.65 in '10, and I'll get to guidance in just a moment.

Solid year, obviously in all -- in many areas, not every area, was what we wanted it to be, but a very good result overall.

Earning very near our allowed returns, which is a focus for us on the Utility side.

Safety is another focus. Our performance matched our 2011 level, which was best-in-class at the American Gas Association.

Finalized our construction on our 345 project. We've talked to many of you about it for a while. And so that's completely in rates and it's now complete and working, and has gone very well. And I mentioned the lowest margin recovery, and I'll save that for a little more detail when we get to Slide 12.

On the Nonutility group, again, Infrastructure Services with a record year, both strong demand and favorable weather. Energy Services had a nice year due to some tax deductions on 179D. Robert will talk more about our expectations for '13.

Coal Mining was adversely affected, primarily by low gas cost. When gas is $2, as it was during a big chunk of 2012, very difficult for our customers' coal plants to run. They get outbid by gas. And when that gas cost is near $3, which of course, it's more like $3.50 right now, but when it's near $3, then those plants should run. So we see a big difference in that regard, that work -- our customers will work their coal piles off, and we think that demand will improve.

And then ProLiance, again, continues to improve as we lower the demand charges and you can see the dividend there.

Slide 9 gets into both guidance, but also, you can see the heading and we want to focus on consistent earnings growth, $1.65 to $2 over this 3-year period. With our estimate, that'd be a 6% to CAGR from 2010 to 2013.

Our guidance is $1.65 to $1.75 for the Utility, $0.20 to $0.40 for the Nonutility, and consolidated, then, a $1.90 to $2.10, and $2, obviously, being the midpoint.

If we look at where our utilities are, for those of you that don't know us as well, in southwest Indiana is the only combo territory that we have. The rest of those territories are gas. You might recall that our Ohio territories are actually the gas properties that we purchased from Dayton Power and Light a decade or so ago. And so you can see where the territories lay out.

Our rate base, $1.2 billion in gas, $1.3 billion in electric, and these are the state jurisdictions. We also have $1 billion on the FERC jurisdiction that I mentioned, the 345 that we finished. And so about $2.6 billion that is in rates now, and the rate base today is about $2.8 billion, to give you a sense of what's happened since the various rate cases that we might have filed.

If we look at Slide 11 on Utility earnings. Utility earnings, the O&M there, we boxed because we're very proud of that record of keeping O&M flat now for our guidance at the third year.

But how we really see the Utility unfolding going forward is a focus on returning, getting a return on infrastructure investments, primarily gas, but also electric, and also some margin growth from our large customers.

We have seen some decreasing residential electric usage trends, a topic we had at our table. We've seen some of that. We'll continue to monitor it. It's not a huge number, given our customer count for Vectren in total, but it is something we keep our eye on.

The infrastructure investments are really about safety and reliability. Obviously, there was a law passed at the end of '11, and a number of those regulations are not yet known, but we've gone ahead and made our estimates in responding to those. And of course, we have our own view of how to make sure that we have a safe and reliable system. We believe we do. But I think things like San Bruno just cause you to step back and reevaluate. And we'll talk about those in just a second.

And then finally, Robert and his group in Treasury have done a great job in lowering our interest expense. We've had a number of refinancings. We've actually lowered our interest expense, you can see, from $80 million in '11 to the expected $68 million in '13. And I would also say that we continue to look for opportunities there, but that's about a 15% drop in our interest expense.

If we look at Slide 12, this is one I mentioned earlier. And I think that we have some recovery mechanisms that stack up very nicely with any other utility. And the bare steel/cast iron, I'll mention because we talked about the speed up in expenditures there again, not additional expenditures, but a speedup.

The Indiana Senate passed this Senate Bill 251, which basically said that federal mandates will get a return on and of as you spend them, and that's if there is a federal mandate for electric or gas.

Ohio House Bill 95, and by the way in Ohio, we already have recovery on bare steel/cast iron. We have -- we get a return on and of as we go on our bare steel/cast iron expenditures.

But in addition, Ohio House passed a bill that basically allows a long-term debt rate recovery on the entire CapEx program, not just bare steel/cast iron, which we get a normal return on equity and debt, but on all other CapEx. That's only for gas companies. And then Senate Bill 560, which is awaiting house approval, actually, would enhance the timely recovery of expenditures beyond federal mandates. So if those infrastructure expenditures we would make in electric or gas, we'd get a return as we go. Again, that would be at the normal return equity and debt. Also it has a rate subject to refund and a forward test year.

And I won't mention, because you can read them, every one of the regulatory mechanisms we have here, but you can see that we have a number that allow us to recover cost, help make sure that we earn our allowed returns in between rate cases.

And then on Slide 13, these will tie together with Slide 12, when we say here, in the middle, regulatory recovery mechanisms. That's really those that I just mentioned to you, or in the prior deck. And you can see that our three-year CapEx expenditure of $940 million, you can see $190 million for bare steel, $140 million for infrastructure replacement, $30 million for environmental. All of those would be covered by regulatory mechanisms. And we've given you actually here the dollar amount by utility.

You can see the step up in bare steel/cast iron. Again that's just a speedup. You can see from '13 to '14. And then the infrastructure replacement, again, is in response to what we see coming out of federal rules and state rules, related to San Bruno and other incidents, as well as our own evaluation. As I mentioned, there are a number of rules not yet in place, but this is our best estimate of what we think the spend will be on the gas side in those areas.

So what does that really mean, then? We think on Slide 14 that the bare steel/cast iron acceleration and the infrastructure replacement, will give us a very good opportunity to help us grow. Our rates are very cost effective on the gas side. The South gas as an example, is the second lowest rate in the state. Our North gas is in the second quartile, second lowest quartile in the state. So we think we have room. Others will be spending dollars as well. And also, while gas costs are at this level, we still think they'll maintain very -- they'll be reasonable going forward, just not at a $3 level. We think now is the time to go ahead and make some of these moves in replacing some of our infrastructure.

You can see what we're looking at on transmission and distribution. I won't comment on each of those, but this actually, in both areas, that we'll be working on. And then this acceleration from 50 miles annually to 95 on bare steel and cast iron. We're also focused on cost management, because we want this consistent earnings growth. We've amended some retirement plans, medical retirement plans, actually improved access for our retirees and saved cost. We moved from 29 operating centers to 13, which was efficiency, but we also have reduced our response time, because of how we've managed that. So it's really very good for the customer, as well as helps us achieve a lot of returns. We've got fleet in the sourcing areas. A number of other things that I think should help us earn those allowed returns going forward, and I hope you've got a sense, from both the regulatory mechanisms and our control of cost, why that should allow us to do that. Robert's going to talk to us a bit about Nonutility, and also some concluding remarks, I think.

Robert L. Goocher

Thank you, Carl, and thanks to all of you for coming today. This is our first slide on Nonutility and just to preface it, I guess, reiterate what Carl mentioned, about 80% to 90% of our earnings come from our Utility business. We do have a pretty robust portfolio of Nonutility businesses that we would expect to generate 10% to 20% of our earnings generally over time here, so I just wanted to talk a little bit about some of these businesses and give you a little bit more detail on how we view them and how we think that they will provide some sources of earnings growth as we go forward.

In particular, as Carl mentioned, the first 2 businesses, Infrastructure Services and Energy Services, are the 2 that we've really focused on strategically as where we want to continue to make investments, to have the opportunity to continue to grow earnings in those 2 businesses. We probably will want to just continue to nurture the investments that we've already made in Coal Mining, and we've got another mine, as Carl mentioned, that will be available to come online once the demand is there to support it. And then at ProLiance, we've been talking about it, it's gone through some tough times. We'll talk a little bit more about it as well as we go forward, but it looks like we'll be able to get that back, we think, to about breakeven this year.

Focus a little bit on the Infrastructure Services business. I thought these comparative numbers might be helpful for us to be able to talk a little bit about it.

You can see that we had a really, an outstanding year at Infrastructure Services in 2012, with over $40 million of net income, up from $15 million in 2011. We have tempered the outlook a little bit for $35 million for 2013 as sort of the midpoint of our guidance. And that's really because the opportunities that we had in 2012 were really good, both from a demand standpoint, but more particularly, from a weather standpoint. It was very warm in the first quarter of the year. So we got started earlier in our Construction business, and then it was very dry throughout most of the year. So we were able to continue construction. So from a construction standpoint, it was really an ideal year in 2011. As a result, we're tempering the expectations a little bit for 2013.

At Energy Services, you can see we earned about $6 million in 2012, and that's really a little bit higher than we had expected along. We had some projects that did qualify for the tax deductions that Carl mentioned a little bit earlier, more projects than we really had anticipated. Again, as we look to 2013, much less projects that will probably qualify, and we'll talk a little bit about why that's at 0, when we get into some of the details on the business in just a moment.

Coal Mining, we had a great year in 2011. Tailed off in '12, as Carl mentioned, with the fact that gas was so cheap, it was harder and harder to sell coal. The volumes were way down. You can see in some of the stats that are in the back of the appendix.

Here, as we look forward in '13, there's still some pretty good-sized coal piles out there that need to be worked down, and I'll talk in a minute about '14, and how we feel like, as we look forward, a lot of these things will be, maybe moving back to be more in balance with supply and demand and maybe some better, longer-term opportunities for Illinois Basin coal going forward, and then ProLiance, we'll talk a little bit more in a moment.

We highlighted in green here at the bottom, we had -- one of our businesses that was sold for a nice gain, Vectren Source, a retail gas marketing business, in '11. So we just sort of carved that out to kind of show you what the earnings stream looked like with our ongoing operating businesses, excluding Source and some of the legacy investments that we have out there.

Let's dive in a little bit into Infrastructure Services. That's 2 businesses operating under the names of Miller Pipeline and Minnesota Limited. We bought Minnesota Limited in the end of the first quarter of 2011, so we've had almost 2 full years under our belt there, and it's really going well.

This has sort of been the star performer in the Nonutility group. And as we look forward, you saw the numbers there, we would expect this to be the primary driver of Nonutility earnings in the near future here. And as I mentioned, we'll be focusing also and see some good opportunities for the Energy Services businesses, more midterm to long term as well.

I mentioned a little bit why we have tempered our earnings expectations for '13. One thing that we're trying to do here based on the feedback from the financial community is to show some estimates of backlog to give you a little bit more sense of how well this business can continue to operate, and this is a little bit different backlog number than you might see. The nature of the business, a lot of the work is done under blankets. It's not all fixed bid-type work. So it's harder to get your arms around exactly what our true backlog is, but we'll talk a little bit more about that on the next slide here.

This business is really, as Carl mentioned, underground pipeline construction, both gas and oil distribution and transmission business. And the drivers that we see out there that we think are long-term drivers, and will drive a long construction cycle, are things that Carl alluded to a little bit earlier, the aging infrastructure that's out there, the bare steel/cast iron programs, regulations that will come about as a result of pipeline safety law that was passed in reaction to San Bruno and some other incidents that will -- regulations will be coming out in '13, '14 and '15 that are likely to drive additional business in this area that we think Miller and Minnesota can really compete for.

And then as Carl mentioned, the shale plays that are out there. Bakken, in particular, is where we're beginning to make some good inroads. In the Bakken, we barely touched the surface at Marcellus and Utica, so we think there's some great opportunities that are really driving that business long term and we mentioned, I think in one of the earlier slides, if you really look out longer term, there's water and wastewater opportunities, and even new construction, but right now, our near-term focus is really the aging infrastructure and the shale plays that will be good, long-term drivers for this particular business.

We've really, again, continued to invest in this business. We've had about 5 small, tuck-in type acquisitions in recent years. We also, as I mentioned, bought Minnesota Limited for about $83 million a couple of years ago, and those have been good. And I think what it does show is that we've been able to both grow organically, as well as through acquisitions and successfully integrate those new businesses, as well as hire new people. We have gone -- our peak employee count in this business was about 2,600 in '11 and peaked to about 3,300 in '12. Up 700 people, so we're able to integrate those new people and get the quality folks that we need to continue to grow the business, again both organically and through acquisitions here.

Talk a little bit about backlog. I won't spend a lot of time on this. As I said, we used an estimated backlog. What we're trying to do is, to give you a little bit more information and I think this will be more meaningful over time as we update it and get better at trying to provide this data on an estimated basis. We show the backlog of about $380 million, and project gross revenues of about $650 million. So those are a couple of data points, but don't give you a lot of information yet until you have some comparability. Over time, as we update this, and hopefully continue to improve on it, that will be information that will be helpful to you to better model the business. So we just wanted to share it. And a lot of the business is in what we call blankets. You get awarded the work. You have contracts with customers, but you don't necessarily know the volumes. Budgets can be cut back, weather can impact it, it's not all fixed price contracts. So we try to break it apart into a couple of categories to give you a little bit of feel for it, and then just took, based on conversation with customers, existing contracts that continued into 2013, some information and basically took about 80% of those numbers and estimated what the backlog is. So hopefully, you find this as helpful, and we can continue to build on it for the future.

This is to give you a little better feel for the footprint that we operate in, in Infrastructure Services, and so you can see, certainly we're in the Bakken shale area, as well as the Utica and Marcellus as well. And you can see where some of our offices are, and I mentioned the number of employees that we have grown from, and we also continue to invest in equipment, $55 million in 2012, much of that in the transmission business, to be able to take on some of those projects in the Bakken and other shale plays there. So again, this is a business we like a lot. We see a long construction cycle. We see this as being one of our premier performers in our Nonutility group, and continue to invest in it for earnings growth opportunities in the future.

This is just an idea of some of the key customers that we have in our transmission and distribution businesses. Miller has been around some 60 years. Minnesota's been around 35 to 40 years or so. But they're really built on reputations and long-term customer contacts. You can see the first bullet there, our top 10 customers, really on the distribution side of the business, average relationship's 25 years. And this is one of those things where we've earned a good reputation for being able to deliver quality construction in a safe manner, and do it reliably and have great customer service, decade after decade, and this is one of those businesses where you're only as good as your last job, and we continue to focus on trying to grow the business and building off of these long-term relationships. That reputation that we've earned has allowed us to add some new customers in recent years, and we'll continue to do that and try to expand our footprint.

We also, as Carl mentioned, in a lot of ways, focus on delivering safe construction and reliable service in many ways here.

Moving into the Energy Services businesses. As you see, we're projecting breakeven results in 2013. We're not excited about that as being breakeven, but I think we're really looking at this as an investment for the future. We continue to hire some of our sales representatives in this area, and the market we focus on is called MUSH, municipals, universities, schools and hospitals. There's often a long sales cycle for a lot of these entities to make decisions, to basically select Energy Systems Group to do their projects for them. And so these relationships take a while to build and help design and work with the customers and ultimately, hopefully get the business. So maybe a 18 to 24-month cycle before you really are able to sign a contract. So we continue to invest in the future, hiring additional people. We should complete that process of additional hires, and get up to around 50 sales reps. Obviously, there are support employees that back those up, that are being hired as well, but we think we'll be pretty much complete with that investment in people by the end of 2013.

One of the things that's really been slow about this business for this year, I guess slower than we would have expected in '12, is the fact that a lot of the entities that we deal with have been facing very tight, strained budgets and they've been reluctant to award this business.

One example is if, if you have a school system that needs to replace some of their energy equipment, whether it be windows, lighting or the HVAC equipment, and they just announced they've got to lay off 10 teachers, it's awfully hard for them to invest in capital improvements. Even though they may save, pay for themselves with energy savings, when you have the optics [ph] of having to take that kind of drastic action. So over time, we're still very optimistic about the business, continue to invest in it, as I mentioned, with people and also, that we think that as power prices continue to rise across the country in coming years, as you make additional investments in the environmental expenditures or renewable projects, which may drive prices up, that the various entities that we deal, will continue to be, sort of push to actually change out. And then you just have the aging equipment. At some point it has to be changed out. You just can't continue to repair it and band-aid it. So we think again, long-term wise, this has some great opportunities.

In addition, on the federal side, President Obama focuses a lot on the energy efficiency of federal facilities, and he's pushing those, many mandates for those to be a lot more energy efficient going forward, so again, we think there's opportunities for us to grab some of that businesses as well.

We also focus on the renewable side here, in addition to performance contracting. As Carl mentioned, I think we've already done about 5 landfill projects, whether to gas or to power. We've done 3 anaerobic digesters, we take animal waste and convert it into power. We've completed those, and we've got a new project, a new landfill project in the Southeast, that the decision on that should be pretty imminent. So we hope to be able to announce that soon as well. So those are some of the things that are going on, that we think are kind of drives the long-term value in this particular business.

Let's talk a little bit about our Coal Mining business now. This is one of the commodity businesses that I talked about, and we are projecting a loss for 2013 of about $9 million. When you look at the tons that are listed there, we do expect to produce about 5.5 million tons and sell 5.6 million, and we've already sold and have priced about 4.6 million or 82% of those. If you look at that, that's a step-up from '12 numbers, but nowhere near the 7.5 million tons that we're capable of producing if we had all of our mines running at full capacity.

In '12, as an example, we sold 4.5 million tons and produced 4.8 million tons. That's part of what you see is driving up some of the costs that are in there for 2012 numbers, where it went to about $48 or so per ton. We are projecting that to come down based on the additional volumes that we'd be able to spread a lot of those fixed costs over, as well as some improved mining at one of our older mines, Prosperity, that's had some challenges within coal seams and other geological conditions. So we're working pretty hard to try and turn those costs around and think we'll make a pretty big dent in that in 2013.

If we're able to open Oaktown 2 mine, which is really virtually complete and ready to open based on demand, obviously that facility has rails, wash plants and other outbuildings, where we can basically spread the fixed costs that are already out there over the larger tonnage. So again, bringing down the cost per ton.

If you look to the next slide here, we'll talk a little bit about it. We're again, not satisfied with the $9 million loss that we expect to have happen in 2013. But as we look to the future, we think Illinois Basin coal really has a bright spot out there, and we're really focused on that and see there are some opportunities that we should be able to realize for Illinois Basin coal in 2014 and beyond. As you saw maybe on the previous slide, we've actually sold more tons, 5.8 million tons have already been sold for 2014 versus 5.6 million tons for 2013. And so obviously, we'll continue to work on selling both '13 and '14 coal, but I think it does at least give you the indication there's at least a bright spot on the horizon for Illinois Basin coal that's out there as we move forward.

Here are some of the things that we see that should be driving that. Central Appalachian coal continues to decline in production. You'll see at the bottom of the slide, a federal report here indicates that total coal production was down in the country about 9% in 2012. Actually Illinois Basin coal was up, I think it was 7%, or 9% rather, over our 2011 number. So again, things that we expect to happen really are Central Appalachian coal is beginning to be reduced in terms of the volumes available, prices have continued to rise there. There are a lot of scrubbers that are being put on in the Midwest and other places that allow Illinois Basin coal to be burned. So with those kind of things and some of the other things that are mentioned on the slide there, we think the opportunities for Illinois Basin coal are bright as you move forward, and once you can get some of those coal piles down that are out there, that reached peak levels in '11 and '12, people should be beginning to contract for coal for '14 and beyond. So we see this as a positive. We posted a couple of prices up there, in terms of the percentages of increase that you can see on the NYMEX related to Central App coal.

There's just not any good indicators, not much sales going on in the Illinois Basin at this point. So we didn't have any comparable prices, but I think it does show that prices are indicated to go up in Central App, and we would expect some level of price increases to be seen in the Illinois Basin as well. And in fact, if you look at the previous slide, I think we're projecting a sales price of about $43 in '12, and what we've already sold in '14 is about $46. So that sort of supports the indications that things should be firming up in '14 and beyond.

Turning to ProLiance. This is our energy marketing investment we have with Citizens Energy in Indianapolis. I think the thing that you'll see, if you look back in the appendix, that Carl mentioned on this business, this is one where it's really been suffering from having a lot of fixed demand cost for pipeline, transportation and storage, and we've been working pretty hard to control the things that we could control. We can't control the market and prices and the variability of them, but the things that we can control, we focused on quite a bit, and we brought down the fixed demand cost from $80 million at its peak in 2010, down to $42 million in 2013, and there's another $9 million or so that would be available for additional reductions in -- by 2015 or so. So we're working on that, the G&A cost, growing the book of business, commercial and industrial business, to try and turn that around, and we think we can get to breakeven this year, and hopefully move the business closer to profitability as we go forward.

So that summarizes the Nonutility businesses. Just to sort of wrap up here, I won't read all of the things that are on the slide here. I think the key things to come away from is that we are focused on providing consistent earnings growth, providing a reasonable total shareholder return that's competitive. We've got solid utilities generating the lion's share of our earnings and work in constructive regulatory environments in Indiana and Ohio. Our Infrastructure Services business looks good. We're making investments in Energy Services for the long term. Coal Mining, as you look out to '14 and beyond, seems to be encouraging and it's great to see ProLiance moving back towards breakeven in 2013. And again, we do focus a lot on total shareholder return, including the dividend, and would again highlight that we have 53 consecutive years of dividend increases here. So with that, I'll stop and maybe ask Carl to come back up, and we'll open it up to questions.

Carl L. Chapman

Questions?

Question-and-Answer Session

Carl L. Chapman

Now's your chance.

Unknown Analyst

[indiscernible] You have 10% annual earnings growth there. That includes all the businesses outside of Infrastructure. If you were just to take Infrastructure on its own, how would earnings grow over there, or EBITDA? Should we think about that, this number here and going forward?

Carl L. Chapman

Yes, I understand. We actually have not shared any numbers by entity at this point. We really looked at it collectively for Nonutility. And the Nonutility in total, we think can be at 10% growth, but we've not shared separate numbers at this point. Other questions? Yes?

Unknown Analyst

On the Coal side, has your outlook for tons sold this year, the delta between what you've already sold, and what you think you will sell, to what extent is that based on a view on gas prices, and to what extent could there be upside or downside to that, based on where gas prices goes here?

Carl L. Chapman

Sure. We've actually not said what the total tons will be in '14 at this point. What we said is we're capable of is 7.5 million. We have already sold 5.8 million. Now we did caution in there that we have 1 customer that we're in arbitration with. It's about 0.7 or 0.8. So 750,000 tons or so in arbitration, on a price reopener, but the other tons are absolutely sold. We believe those tons are sold, and we'll see what happens in the arbitration. So we've said 5.8 million tons sold. We've not said what our total expectation is there. It's really, again, subject to Oaktown 2 opening, what the demand would be.

Unknown Analyst

And just with respect to '13, you're expecting sales of 5.5 million or 4.6 million sold, I guess, with that delta, how much of that got --

Carl L. Chapman

Are you talking about '13? I'm sorry, I misunderstood the question. Really, what we look at is anything over $3 is what it takes, I think, for our tons, or our coal, to be cost effective. So I think $3 should be a reasonable number. Today it's $3.50. So we don't see a big problem related to gas. Obviously, should it drop down low again, customers may find themselves with additional tonnage. Although, since they were not buying coal, obviously the piles are still going to reduce either way. Sorry about that. Other questions?

Unknown Analyst

All right, I'll start with the Infrastructure Services footprint first. I'm looking at the slide, number on 18. It's like you got the Eastern half of the country pretty much covered. A lot of work getting done in the West as well, water business along the coast and north in Canada. Wondering if you think that you've got the capabilities maybe to go after some of that business, or do you find another way to get, to expand the footprint of that?

Carl L. Chapman

Michael, I think that we're open to expansion. At this point, we've been a lot more focused on the Bakken, the Marcellus Utica. It's really about just where do you put your resources, and we think that we can grow nicely staying focused where we are. We're not opposed to looking at other areas, but we would see this as where it makes most sense to us. I would also mention, we've looked at certain other areas that are nonunion. We're obviously a union contractor. At least at this point, we don't have the desire to be both. Obviously, some companies make that decision. We will continue to think about that. But at this point, we're a union contractor. Some of these other areas are very heavily nonunion, and so we would not go into those areas at this point.

Unknown Analyst

Yes, a few more quick ones. On the Coal business, your Southeast negotiations, wondering when that might be concluded. And if that's successful, would that be sold into 2013, or would that be for '14 sales?

Carl L. Chapman

It's very difficult to give you exact timing on that, because again, the customers are very focused on, not only just the fact that they have some higher coal piles, but also just what may happen going forward. So they tend to be willing to do more spot than they might have been in the past. I think once gas costs are more settled in a range like today, that probably will change, but I think, the reality is, is that we are in discussions with a number of customers, not just in the Southeast, and it really just depends on when they decide to pull the trigger. So it could be in '13, it might not be until '14, again obviously, we've not made it date certain, but we are in discussions, routinely, in trying to sell additional coal. Our focus in the Coal business: Run safe mines, get Prosperity costs in line, sell the coal, and that's really what -- where we're focused.

Unknown Analyst

And just a quick last one. On SP 560, where you've looked at the House, see any pushback or that look like it's...?

Carl L. Chapman

Mike, my experience with legislators, always difficult to predict. I would simply tell you that in the Senate, it passed by a wide margin, both the Senate and House are of the same party, it's the Republican Party. We don't expect huge problems in the House, but we'd just have to see how the representatives sort that out, but we feel good about the bill at this point.

Unknown Analyst

How close are you to earning your allowed ROEs?

Carl L. Chapman

We've not actually described the exact number. What we've said is we're very near. And so basically, we would say we're earning our allowed returns. Of course, what we said is at or near. So we are not quite to those allowed returns, but we're pretty close. And we've just not given those numbers at this point.

Unknown Analyst

On ProLiance, there's a [indiscernible] risk that's capped at $2.5 million less than 1, typically. If basic spreads were to widen or seasonal spreads were to widen, how would that affect the group? Would that be profitable or is it -- has it been hedged out? I'm a little confused there.

Carl L. Chapman

Yes, we have not actually given the percentage hedge. So some of our volumes are hedged where they could not be unhedged. Others are hedged month-to-month. We don't take open positions per se. So the only issue is, where have we hedged against. If we've hedged against, and we have some in '14, or if we've hedged month-to-month, would determine whether we have the opportunity or not, but we don't take open positions, such that we have the risk of a blowout causing us a big problem, but we've not disclosed what percent at this point in what year.

Unknown Analyst

That's an awful lot of earnings you've created there since inception, with no open positions?

Carl L. Chapman

That's correct.

Unknown Analyst

In the Energy Services group, you keep talking about the expectation of rising electricity prices over time, but power prices in the Midwest are peanuts now, and so you're hiring more sales staff, and where the -- so the trend, to me at least, where I sit, is lower power price?

Carl L. Chapman

It's a very good question. And of course, you're focused more on the wholesale side or the day to day. When we look at this, we're really talking about customers who are buying their power from their local utility. Many of those utilities are going to be putting in a lot of environmental equipment in order to comply, either with air, water, ash or MATS on mercury. And so what we see is through '16, it's not the case for us, because we've done so much of our environmental spend. But across the area and a wide area, we see power prices rising because of that spend. And it's not just environmental. The electric utilities, I think also now are coming to grips with old poles, other aging infrastructure, and I think you're going to see a lot of increase in electric prices because of that. Day to day, you're right, it's tied to gas, but that's not really how most of these companies or these municipals and others are buying their power.

Unknown Analyst

Okay, and then a quick question on that backlog. The backlog number you have now, I think it was $380 million, something like that, and then, but you said on expected gross revenues was $600 million or so, so the difference between those 2 is, that $200-plus million is, you can consider backlog, but you expect those revenues to come about?

Carl L. Chapman

We're comfortable with our guidance at $650 million. What it really boils down to is just an awful lot of utilities and pipelines don't even think about releasing their contracts until about now and a little later. So we, it's -- they're not in the backlog. But as Robert said, what we would focus on is, first of all, we draw your attention to who the customers are, and they're all doing big infrastructure spend. The second one we call your attention to is what he mentioned as the top 10 customers' 25-year relationships. The largest customer at Miller Pipeline is the first customer at Miller Pipeline, 60 years ago. So we think we have very good, strong relationships. We're focused on safety. We're focused on giving the customer value and so we feel good about our relationships. That's why we feel like even at $380 million, we're comfortable with the $650 million. And what we hope to do in the future, we'll give you comparative backlog so you can have a better sense of how that looks compared to the revenue expectation. But this is our first year and so we'll look at that going forward. Other questions?

Unknown Analyst

Forgive my ignorance of the ProLiance business, the business model, but the revenue level there, is that meaningful, or is that not a metric that I should focus on?

Carl L. Chapman

Yes, it's not really a metric to focus on. Really, the way ProLiance, just very quickly, makes it's money, the primary amount of money. First of all, we have 1,800, 1,900 commercial and industrial customers. So that's one way. But the primary way on the optimization is through spreads of one pipe to another, from cash to NYMEX, day to day, and then the seasonal, but the revenue is really not a meaningful calculation, that's why we've just given you margin.

Unknown Analyst

Okay, I thought that might be the case. So then focusing on margin, could you explain the gross margin drivers for this current year's guidance and beyond? You have a $45 million swing, and you flagged on Slide 35, a $13 million reduction in fixed demand cost, which I assume is part of that gross margin improvement. So maybe you can identify where the other $32 million is coming from, since I don't have any revenue dynamic. It's a hard business to understand.

Carl L. Chapman

Sure, happy to do it. Again, not going to give you a lot of detail, but I can tell you exactly what happened. First of all, there is a fair amount of weather, so there's some dollars that's just from this commercial, industrial book, as we think more about normal weather in '13 versus what happened in '12. But the biggest driver is the timing of the recognition of the margin from the storage transactions. And that's totally dependent upon how we hedge. The question was asked earlier, when are you hedged against? So if we're hedged against 1 period, that will result in the earnings recognition in 1 period versus the other, and so we're very comfortable that what we have is just based on the timing of how that worked in '12, versus our expectations in '13, but that timing will cause a big swing in the margin. We're not counting on some blowout of seasonal spreads, or a blowout of a spread against one pipe versus the other, but more the timing.

Unknown Analyst

You can see on a three-year basis that the D&A level has come down. What is the SG&A level like at this business?

Carl L. Chapman

At ProLiance?

Unknown Analyst

And how much of a burden is that, and when can this become, if ever, a bottom line contributor again?

Carl L. Chapman

Yes, SG&A is not a huge number. There's about 100 employees at ProLiance, and I don't recall the exact number, and I think we've not disclosed that number for a while, but we actually have been very focused on reducing SG&A. The driver here really is about those demand charges. That's how we can get this business back to profitability, when you go from $80 million to $42 million, to perhaps $9 million more. So that's really the driver of profitability, but we have reduced employment, I think about 20% at ProLiance over the last few years. Other questions? Well, okay.

Unknown Analyst

With respect to the Infrastructure Services business, I was wondering if you could quantify at all, how much weather helped 2012, or if not, I guess what I'm trying to get at is, do you have a view on kind of, what the core demand is, kind of changing from 2012 to 2013? Do you actually think demand is, is flat or down this year, or would it be kind of up on a weather-normalized type basis?

Carl L. Chapman

We've not given that number, in terms of quantification. What we would say is, clearly demand is up, and it's up because of additional bare steel/cast iron spend. We talked about that at our own utility. That's true across the country. It's also true of big transmission spend on repair because of big pipes' response, and also because of more and more going on in shale. We shared last year that we really had done very little to put dollars related to shale. That changed in '12. And it will continue to change. As an example, the Bakken is flaring 30% of the gas. There'll be a lot of pipe laid. There are thousands of wells to be hooked up in the Marcellus Shale. So we think we're in a long cycle here, but we've not given the exact difference year-to-year. We're hopeful in the future, when we look at this backlog on a comparative basis, we can give you a better sense of that, year-to-year.

Unknown Analyst

And have you or can you give us any sense of kind of the mix in that business of, how much is shale versus how much is distribution-type work?

Carl L. Chapman

Yes, we're not likely to do that, because of competitive reasons. We would prefer not to give our competitors a lot of detail on the makeup of our revenue.

Unknown Analyst

Well, fair enough. Also, just on the Utility CapEx side, should we assume if SB 560 does pass, that you will see more dollars flow down to some of the kind of tracked CapEx line?

Carl L. Chapman

No. Actually, we've assumed that 560 passes in the numbers that we've estimated there.

Unknown Analyst

CapEx on the Infrastructure Services, are those, are you buying -- what is that? Are you buying backhoes versus lease, like what is the philosophy on that?

Carl L. Chapman

Yes, were basically buying all kinds of equipment. A lot of it would be the big spreads that you use as you lay pipe in the transmission side of the business. What we do is we're very cautious. We'll lease equipment for a period of time, until we see that the demand in that area is really what we thought it would be, and then we're willing to buy the equipment, but it would be the equipment across the realm, for both -- or both transmission and distribution.

Well thank you very much, everyone, for being here and I appreciate your interest in Vectren and look forward to talking to you again. Thanks.

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