Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Vectren Corporation (NYSE:VVC)

Q1 2009 Earnings Call

April 30, 2009 2:00 pm ET

Executives

Niel Ellerbrook - Chairman and CEO

Carl Chapman - President and COO

Jerry Benkert - CFO

Ron Christian - General Counsel and Secretary

Analysts

Paul Patterson

Barry Klein - Citi

Operator

Good afternoon. My name is Clark, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vectren Corporation First Quarter 2009 Earnings 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. Schein, you may begin your conference.

Steve Schein

Thank you, and good afternoon to everyone. We really do appreciate you joining us on our call today. Senior management team here today will include Niel Ellerbrook, our Chairman and CEO; Carl Chapman, our President and Chief Operating Officer; Jerry Benkert, our Chief Financial Officer; and Ron Christian, General Counsel and Secretary. Kind of as a reminder, this will be a Webcast. Copies of the slides and our release are on our website. I'd also like to remind you that some of the statements made on this call will be forward-looking statements.

They are subject to risk and uncertainties that could cause actual results to differ materially from those discussed in the presentation. I would also ask that you refer to our news release and Form 10-K for more detail. With that, we will take Q&A at the end of the call, and I'll turn it over to Niel.

Niel Ellerbrook

Thank you, Steve. I'm going to provide some fairly high level of comments, and then ask Carl and Jerry to follow-up with a little bit more detail on the business segments. Needless to say, we're pretty happy with the quarter $0.90 versus $0.84, a year ago; $0.06 up despite additional shares outstanding and lastly $0.07 up over consensus estimates of $0.83.

It's particularly satisfying I think, given that we face the toughest and are facing economic environment perhaps since the depression. Illustrative event is the fact that large volume customers saw declines in volumes in the electric business of about 15%, margins down 5% year-over-year, gas business down about 16%, margins down about 8.5% over a year ago.

The fact that we have decoupled tariffs in Indiana and implemented rate relief in Indiana early last year and the in Ohio in February of this year, allowed us to show modest margin increases despite volumetric declines of about 9%. As a reminder, we have an electric decoupling request pending. All filings are now complete and we're hopeful for an order soon, but obviously the commission will set its own schedule now that everything is complete.

Looking at the non-rate business, all business segments had good quarters. Vectren Source had a particularly good quarter, but Coal, Miller and SG are all easily up over last year's performance and ProLiance, while in the same range, I think, we're pretty optimistic as we see the future for ProLiance and Carl will get into all those segments in detail.

Turning to other 2009 highlights we achieved a couple of fairly significant debt financings. Both done at very attractive rates, in what we think were a pretty tough environment to finance. We really completed $100 million, 11-year deal, Vectren Capital raised $150 million, and as I said all those rates were very attractive and I think somewhat better than actually we had hoped for when we began the process.

In Ohio, we implemented a $14.8 million rate increase from February 22nd. Importantly, in addition to the revenue, we also made significant progress towards straight, fixed variable rate design for our residential and commercial customers. To illustrate that, we entered the case with a service charge for residential customers of $7. We increased that to $13.37, and then next year, we'll take the final step, increasing another $5 to slightly over $18.

What that allows us to do is to recover our fixed cost through the service charge, which reduces our exposure. In fact, virtually eliminates our exposure to volumetric risk whether it be through weather or other factors, so we're very pleased with that change. We also saw a tracker approved, which provides for timely recovery of cost incurred in connection with bare steel and cast iron and certain [riser] replacement. We're authorized to spend nearly $24 million annually in connection with that program. So that's also a very favorable result.

We made great progress in the quarter on development of the Oak Town mine. Remember, when we get Oak Town online, we'll see hopefully production this year rise from last year's 3.5 million to nearly 5 million tons. And 70% of our planned production for the year will reflect higher prices, so we start to see some of that in the first quarter, but we'll certainly see more throughout the year.

Carl is going to comment on the recent weakening in prices and the implications of that. So as a result of all those things, I'm pleased to affirm overall guidance, $1.65 to $1.95. We do now see ourselves heading probably into the lower half of the utility, assuming the impact of the recession continues without improvement.

Now, there are those who are starting to forecast some improvement in the fourth quarter. We certainly hope to see that. But that's not in our forecast. With respect to the non-rate business, we really see ourselves in the upper half there. We've gotten off to a good start and we see a positive outlook really for all business segments. So with that, let me turn it over to Jerry for more detail.

Jerry Benkert

Thanks, Niel. On the utility side, we have just a couple slides and I'll make a few comments in addition to Niel's. The overall theme on the utility side is that we're seeing this year play out as we expected it, and generally as we discussed it in our February teleconference. So Niel already mentioned the earnings. We were pleased with the $56.2 million of earnings, which were down just about 3% in this difficult economy.

Relative to earnings per share, the other $0.03 reduction really related to the additional shares where we drew down the equity for June a year ago, which were the additional funds to help secure the balance sheet, so it was nice to have those dollars available, the share impact will impact our first quarter and our second quarter of this year. Decrease in earnings overall, he mentioned large customer usage and lower wholesale power marketing sales. I'll comment more on that in a moment.

Overall, on the plus side, we did have some additional margin dollars coming through for regulatory initiatives, and we benefited from lower interest cost. Now, that came through partly because of lower balances, financing inventory, and gas cost falling off; that helped nicely. Interest rates themselves on the short-term side are down very low now and then longer term we think we came out pretty favorable on the long-term financing. We really took that financing on to put ourselves in a nice position of not relying to any great extent on the facilities and the short-term rates.

Having said that, had we not done the long-term financing, if we were less far down that path, as maybe some others, obviously, we would have saved some dollars there, so we think it's a good long-term answer. Moving to the next slide, and just looking a little bit more at utility margin; right before going into the margin, I'd comment on the cost side, really not much new to share there, because it's serving out as it was expected on the year. So to the extent that we had projected some bad debt cost or pension expenses at a bit higher level.

We're really on track there; and likewise, with our cost control measures, so not much new on the cost side. Looking at margins overall, big picture at the top, retail gas margins were up, actually up about $1.2 million. And total electric retail margins were down only $800,000. That's taking into consideration that the economy had an impact and we had some offsetting rate relief and track costs.

On this page at the top we set out the recession portion, sort of the negative impact that was underneath those fairly flat margins. So you can see the large customer impacts, Niel already spoke to the percentages, roughly 15% decrease in volume, but lesser impact on margin as some of the fixed or demand portions of the bills help to stabilize the overall margin impact. Also we had some decline that came through in this smaller customer ranges around the residential and commercial margins on the electric side. That was roughly $1.4 million.

Again, Niel already gave you an update on our decoupling efforts on the electric side, which should help there assuming that they they're successful. Looking at margins from wholesale power marketing activities, we say that they're down a net $2.4 million, net of some increased margin on electric transmission investments. Overall, the margins are down $4.5 million, and that's somewhat significant and that was really because of softness in the market.

We sold roughly 25% less volume for wholesale power marketing sales and the margins were lower, driven primarily by a low price in the MISO markets, both real-time and day ahead, as really very low gas prices are starting to bring on some gas-fired combined cycle plants, which are impacting the price at the margin. Overall I think the utilities playing out pretty much as it was described at the last teleconference, as Niel said, maybe tilting just a little bit lower in the range. Carl?

Carl Chapman

Thanks, Jerry. Let's look at slide eight for a summary of non-utility results. As Niel said, obviously, we're quite pleased with the first quarter non-utility results. The $10.2 million or $0.12 per share improvement was across all three primary businesses, which actually improved by $0.16 with some offset then by the share dilution as well as the tax true-ups in the last year and other businesses. And we'll discuss each of our businesses in the next few slides in some more detail, but I would remind you that we provide metrics as always for the larger businesses on slides 18 to 19.

ProLiance's results were discussed on slide nine and as expected, earnings were slightly less than last year although not much due to lower seasonal margins really that were locked in last year. Of course, storage optimization continue to be the main driver of ProLiance earnings, and as we shared in our February update, we started to see seasonal spreads widening at that point, and that has continued on at this point, and we continue to lock in those spreads.

This should present nice opportunities for late fourth quarter ‘09 earnings as well as into ‘10, so really a bit of the opposite of where we saw the lower spreads last year. We started to see those spreads widen a bit and we continue to lock those in. We also think the cash to NYMEX spread should be strong this summer due to likely storage congestion from high production even though there has been a lot of cutback in the rigs and other things, it’s still seeing a lot of high production, as well as the demand destruction some of which Jerry mentioned.

So we continue to believe there will be storage congestion, which should give us nice cash to NYMEX spreads. We don't see it as high as the third quarter last year, which was just very strong, but we believe those spreads will be very good. Slide 10 discusses ProLiance's 25% investment in Sempra’s Liberty storage. Recall, we had disclosed at year-end that subsurface and well completion problems and delayed completion at the Sulfur site. There are two sites with an expansion at the Hackberry site, and this is the Sulfur site.

We also disclosed that if the corrective measures were not successful, some of the equipment would be used at the Hackberry expansion site but that a write-off of up to $12 million after tax at the Vectren level could be possible. To-date, unfortunately, additional corrective measures have not been successful. However, we continue to look at further corrective measures and evaluate those, but would say that if not successful, the Sulfur site may not go into service or could have reduced capacity; and if so, an impairment could occur.

Slide 11 discusses our retail market or Vectren Source's very strong contribution in the first quarter. The $8.6 million earnings or $6.6 million increase was primarily a result of favorable market conditions related to our variable price contracts. The large drops in gas costs simply occurred more rapidly than the revenue reductions, and allowed the good opportunities.

Customer count was also up 14,000 or nearly 10%, but of course, demand seasonality in this business will result in second quarter and third quarter losses, as it always does, and we expect this compression in margins, some compression in margins now that revenues and costs have dropped more ratably. However, on the longer term, we do have greater storage in this business, now up to 6 Bcf, and that should provide nice opportunities, going forward.

Looking at slides 12 and 13, just to provide a bit further color on our coal mining business, earnings are generally on track. As Niel mentioned, higher revenues due to higher Illinois basin prices on about 70% of our 2009 coal, but those increases are somewhat offset by planned cost increases, primarily from the continued reconfiguration of the Prosperity mine. As a reminder, that reconfiguration began in the last half of 2008. It will improve productivity in the longer term, medium term and longer term, but will also prepare us for future mine safety and health requirements as well.

The timeline is that the bottom of slide 12, just to give you a sense, and that configuration will continue throughout the year and be complete by April 2010. Again, that will allow reduced maintenance on the belt lines. We'll also be sealing off part of the mine as we go, which will reduce maintenance. It allows us to move to split air, which means then that we can have two continuous miners in each section of the mine at the same time. We also have put in more efficient battery operated coal haulers. And we think these eventual improvements should amount to 25% to 35% in productivity.

Looking forward, Oak Town is right on schedule, and will see production in late June. I would remind you, again Niel said, we've seen some reduced coal prices, but we have 90% of our 2009 coal priced. About 70% of the 2010 coal priced, and we are in discussions with a number of utilities and expect more activity as the summer approaches. So we'll monitor closely any reduced coal burn from our customers, but also the weakening prices and as we get on coal at Oak Town, have a better sense of where those are going, but again, 90% of the 2009 coal is already priced.

We do continue to be cautious on our cost per ton estimates. Until further Prosperity reconfiguration, and we actually get on the coal at Oak Town. On slide 13, what we tried to do is show you how margin and the production by mine, by quarter, which really will give you a little better sense, we hope, of the ramp-up in the 2009 earnings. We shared in February that there would be a significant ramp-up.

Again, as we have additional volumes from Oak Town, as we have additional volumes from the Prosperity reconfiguration, but also Oak Town has of course no legacy contracts, so it's both a higher revenue mine and a lower cost mine. So all of those things coming together to increase the margin throughout the year, and we've provided you a quarterly estimate of that. I would remind you that the margin does not reflect the additional $2 to $3 per ton of interest, overhead and corporate allocations that we have described previously.

So hopefully that slide will give you much better sense of the ramp-up in coal mining earnings. Slide 14 provides a brief look at energy infrastructure, which had a great quarter. Both businesses have seasonal losses, but reduced those losses in total from $3.1 million to $0.5 million. Miller Pipeline was helped by favorable weather conditions, allowing more profitable completion of several projects, and you'll be able to see that in the margin percentage in the metrics.

To-date, we continue to believe that our reductions that we had estimated for Miller's utility customers, related to capital constraints, is on track. We're still hopeful there could be some lifting of some of those reductions or cuts by utility customers due to bonus depreciation allowed in the Recovery and Reinvestment Act. Longer term, we think the Act should provide really nice opportunities for Miller, both due to highway relocates, which will require gas pipe relocates and waste and water drinking projects. Energy Systems Group margin percentages were very strong in the quarter, helped somewhat by an early completion bonus on a renewables project, but also strong on a number of our other projects.

Our new contracts at Energy Systems Group are on track. The backlog is up $16 million or 35%. April saw another $11 million in new contracts and the sales funnel is strong. We think the stimulus dollars should be very helpful, but would note that there could be a slowdown in some customer decision making as they sort out the stimulus money, but I again would remind you that our backlog is very strong right now.

Also the energy efficiency tax deductions from the 2007 energy bill will continue to allow good earnings as well over the next several years. So again, we're very happy about the performance of the non-utility, and as Jerry said, he gave you the thoughts on our utility business as well. Just wanting to close with a few comments to remind you what we see as our key investment highlights.

Our regular storage strategies are focused on de-risking the business. You can look at slide 17 in the appendix to get the details of that. They've already been mentioned to some by both Niel and Jerry. We also think we have regulatory strategies that will provide earnings growth. Strong credit ratings, Niel mentioned the recent access to the capital markets. We think that demonstrates our position.

The dividend is secure, annual dividends having been paid or increased for 49 consecutive years. We think, again, 2009, nice EPS growth, even given the economy. Long-term growth opportunities for each of our businesses, the utility prudent infrastructure, spending, the reg strategies that I mentioned; ProLiance really talked about volatility in the market as widening seasonal spreads, which should make for very nice late fourth quarter and 2010.

Coal mining will be up to 8 million tons by 2011 from closer to 5 million this year and as Niel said, 3.5 last year. So a 3 million ton production even over 2009 levels. Miller again, we believe the capital constraints will be eased by a number of the utilities, if not in 2009, certainly over the longer term, and because many of the utilities have returns allowed on infrastructure replacement programs and would see some of those programs some of the first to be restored.

Finally Energy Systems Group, again, an increased national focus on energy efficiency and renewable energy sources position Energy Systems Group very nicely to take advantage of both of those areas. With that, I think we're ready for question-and-answer.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Paul Patterson. Go ahead, your line is open.

Paul Patterson

How are you? Just I wanted to just go over the coal for a little bit more here. The pricing that you've hedged in for, did you say 70% that you've hedged so far for 2010?

Niel Ellerbrook

Yes, for 2010.

Paul Patterson

And how does that compare to the price that's you guys have got so far in your hedges for 2009?

Niel Ellerbrook

Basically, the pricing that we have has what I'll just call slight or inflationary increases for 2010 on all the contracts, and so the prices are generally similar, but some inflationary increase.

Paul Patterson

Okay. And so when we look at this, and we look at let’s say the stuff in the appendix, do you think that the gross margin per ton should be increasing or about the same?

Niel Ellerbrook

Well, I think we would start off by thinking in terms; first of all, we would remind you of the ramp-up this year when you're looking at margin, but I think we would think in terms of the margin per ton being comparable with the exception of course that we would have a higher percentage at new prices. In other words, we have some legacy coal. We said 70% was re-priced, so we have 30% of this year's tonnage. Obviously those percentages would be different next year, depending on what prices we get on the coal that's not yet priced.

Paul Patterson

Okay. I guess, what I'm wondering here is what you're saying is that you've got some contracts that have increased that have escalators in them, but the amount that's uncontracted right now would have a lower price; is that right?

Niel Ellerbrook

What I'm really saying is all of the coal would have escalators, but the 30% that was not increased on January 1 that coal as a percentage of next year's tonnage would be a smaller percentage. So that's really all I'm describing. So we have 30% that did not have a price increase in 2009 and that same 30% of the coal, which has an escalator, but that same 30% of the coal would be a lower percentage of next year's production.

Paul Patterson

Okay. You also mentioned that gas; I think you might have said, could you just talk about gas displacing coal, because of its current price and what you see the outlook like that for going forward?

Niel Ellerbrook

Well, certainly the gas is replacing coal in certain areas. We really have not seen a significant amount of that in our area. And so it really depends on obviously where gas prices go from here, but we really have not seen a significant amount of replacement at this point.

Paul Patterson

Okay. Just finally, you mentioned me that you might be going, I guess, you are going in for a decoupling case and what have you. Is it just simply going to be limited to that issue, or is there any other possible regulatory stuff that you might be going for as well?

Niel Ellerbrook

We actually completed the decoupling case. I think I indicated the filing. In fact, the last filing I think was made last Thursday. It was limited, Paul, to just decoupling and we should hopefully have an order soon. With respect to what we're going to do beyond that, that's something we study all the time. We don't have a calendar. We don't have anything definitively planned as it relates to rate relief or regulatory filings beyond decoupling right now.

Paul Patterson

Okay.

Carl Chapman

Paul, I’ll just to add to that. Of course, it was decoupling and conservation focused, so there you get to the driver was a three year DSM program of roughly $14 million.

Paul Patterson

Okay. At this time you don't see any need for rate relief of any sort; correct?

Carl Chapman

That's where we are today. We have no explicit plans at this time to file for rate relief, but we continue to study that, just as we would normally on sort of an ongoing basis, if you will.

Niel Ellerbrook

I think to piggyback that, what's sort of unusual about this, I guess, is the economy and what sort of prolonged effects we're going to see and sort of what the new normal becomes, and so it's hard for us to sit here right now and figure out exactly how much economic recovery we may see, and when we'll see it, and that will be a big influence on our plans for rate relief.

Operator

Your next question comes from Barry [Klein]. Your line is open.

Barry Klein - Citi

Hey, it's Barry Klein over at Citi. I had a follow-up on the coal discussion. How much more in capital costs do have you to get the Oak Town mine up at running?

Carl Chapman

For Oak Town one and two we're a little over halfway there at this point.

Barry Klein - Citi

Half way. So half of the CapEx is still remaining?

Carl Chapman

Yes. Roughly.

Barry Klein - Citi

Okay. With regard to Vectren Source, you said 6 Bcf for the winter of '09 and '10. Just as a reminder, what was it for this past winter? What was the storage capacity?

Carl Chapman

It was probably about 4 Bcf, so we climbing to about 6.

Barry Klein - Citi

Got you. With regard to conservation, I think in the slide deck you said it was about two, am I right to assume that it's about $0.02 usage declines relating to conservation, was about $0.02 on earnings or am I misreading that?

Jerry Benkert

Barry, the conservation decreases that would come on the Indiana side, for example, for residential and commercial customers, there we would not have an impact because the decoupling would make it up, but you're correct, on the margin side generally, we did note some decline on the electric customers, going back to look at that quickly.

Barry Klein - Citi

What percent was the decline in volumes for industrial, I guess, it would be mostly industrial, but what was the decline on those industrial electric volumes?

Jerry Benkert

Again, the industrial electric volumes were down roughly 15%.

Barry Klein - Citi

Okay.

Jerry Benkert

The overall industrial margins, and we've got some statistics attached to our press release, but the overall industrial margins were down maybe only 5%, and that's partly because some of the bill was fixed and so the margin doesn't go down as much, and partly because there was some smaller offsetting rate charge adjustments that track costs and the like.

Barry Klein - Citi

Okay. Got you. The 15%, do you expect that to moderate a little bit for the remainder of the year?

Niel Ellerbrook

I think our forecast assumes that the economic decline that we've seen in the first quarter probably continues and as I indicated, we're certainly hopeful that it will moderate and come back, but frankly, it's sort of anybody's guess, I think, in terms of what the economy is going to do. There certainly are now prognosticators who’d see some improvement in the fourth quarter and we would like to see it, but we are not expecting it.

Barry Klein - Citi

But as far as your guidance is concerned, it assumes that these declines, by reiterating, you're assuming that these declines continue going forward; correct?

Carl Chapman

Right.

Barry Klein - Citi

Okay.

Carl Chapman

We are not expecting any significant improvement in the economy in our forecast.

Barry Klein - Citi

Okay. Great. Thanks for the time.

Operator

(Operator Instructions) There are no calls in queue at this time.

Niel Ellerbrook

Well, we would like to thank everybody for joining us on our call. For those going out west, we look forward to seeing you out there at AGA. As always, have you any questions, please give us a call, operator that does conclude the call.

Operator

This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Vectren Corporation Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts