Vectren Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Vectren Corp (VVC)

Vectren (NYSE:VVC)

Q1 2013 Earnings Call

May 02, 2013 2:00 pm ET

Executives

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

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

Jerome A. Benkert - Chief Financial Officer, Executive Vice President, President of Vectren Shared Services and Director of VUHI

Analysts

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Michael E. Gaugler - Brean Capital LLC, Research Division

Operator

Good afternoon, my name is Joanna, and I will be a conference operator today. At this time, I would like to welcome everyone to the Vectren Corporation First Quarter 2013 Earnings Call. [Operator Instructions] Thank you. Robert Goocher, Treasurer and VP of Investor Relations, you may begin your conference.

Robert L. Goocher

Thank you, operator. Good afternoon, and thank all of you for joining us on the call to review Vectren's 2013 first quarter results. This call is being webcast and shortly following its conclusion, a replay will be available on our website at vectren.com in the Investor Relations section. Yesterday, we released our 2013 first quarter results. This morning, we filed our 10-Q. Copies of the earnings release, today's slide presentation and the 10-Q can all be found on our website. Further described on Slide 3, I would like to remind you that many of the statements made on this call will be forward-looking statements. Actual results may differ materially from those discussed in this presentation.

Carl Chapman, Vectren's Chairman, President and CEO, will provide opening comments on the quarter. He will then turn it over to Jerry Benkert, Executive Vice President and CFO, who will discuss in more detail our Utility and Nonutility results in 2013's earnings guidance. Following our prepared remarks, we will be glad to answer questions that you may have. Also, joining us on today's call is Ron Christian, Executive Vice President and Chief Legal and External Affairs Officer. With that, I'll turn it over to Carl.

Carl L. Chapman

Thanks, Robert, and I'd also like to welcome everyone to today's call. And as always, we appreciate your interest in Vectren. As you'll see on Slides 4 and 5, first quarter 2013 net income was $49.8 million or $0.61 per share compared to net income of $51.3 million or $0.63 per share in the first quarter of 2012. Utility results were down slightly compared to the prior year, but we remain confident the Utility Group can earn at or near allotted returns in 2013. First quarter Nonutility results were also slightly lower compared to 2012, reflecting very strong results from Infrastructure Services and improved results from ProLiance, but offset by lower contributions from Coal Mining. Taken as a whole, we're pleased with first quarter results that were generally on plan. ProLiance's first quarter results reflected a $1.3 million improvement over the same quarter in 2012, as ProLiance took advantage of lower fixed demand cost resulting from renegotiating or dropping many of its pipeline, transportation and storage contracts.

As disclosed in Vectren's 2012 10-K and in the first quarter of 2013 10-Q filed this morning, ProLiance continues to explore strategies and alternatives to its historical business model, including substantial demand cost reductions. These alternatives, if pursued, could result in an amount realized below Vectren's carrying value of its investment in ProLiance. Results of that analysis and the potential impacts on operations, as well as the continued pressure on seasonal and cash to NYMEX spreads, including the timing of realization of these spreads, currently make it difficult to predict ProLiance's results for 2013. And as a result, we're excluding ProLiance from our earnings guidance for the remainder of the year.

Since this analysis and valuation of various alternatives is ongoing, we do not have any additional insights to share at this time regarding the alternatives being considered or the timing in which our analysis and evaluation will be completed. Jerry will provide further details on Utility and our Nonutility results and expectations in a moment. But before I turn it over to him, I'd like to touch on a couple of other noteworthy items.

For our Coal Mining business, I'm pleased to report that our Oaktown 2 mine began production in April as we were able to secure the initial sales contract for this mine in late March. Throughout April, we have continued to achieve additional sales for Oaktown 2, which sets the stage for a promising future for our Coal Mining business as we continue our focus on safety, efficient production, reducing cost at Prosperity and securing additional sales. As a reminder, our 3 Indiana coal mines and the Illinois basin will be able to produce approximately 7.5 million tons annually when in full production.

While we're excited to open Oaktown 2, given the prospects of lower mining costs in the future, we want to remind you that during the ramp-up stage, costs will be higher. And lastly, recent changes in our mining plan at Prosperity are expected to improve production and reduce costs for the remainder of 2013, which Jerry will cover shortly.

Finally, we continue to take the opportunity to refinance debt in this low interest rate environment. In April, our Vectren South Utility subsidiary reissued $62 million of tax-exempt long-term debt at an average interest rate of 4.03%. This will result in annualized interest savings of approximately $800,000, which, along with our other recent refinancing, puts us in great shape to meet or further improve on our initial 2013 guidance estimate of $68 million of Utility interest expense, $12 million less than just 2 years ago in 2011.

Indiana Senate Bill 560, which will enhance the timely recovery of infrastructure investments beyond federal mandates, was signed by Governor Pence on April 30 and becomes effective immediately. Jerry will walk through more details of the Bill, but we believe it is a strong complement to the legislation passed in 2011 in Indiana and Ohio, and it's supportive of accelerating Vectren's and other Indiana utilities bare steel and cast iron replacement programs, as well as other gas and electric infrastructure improvement programs to further enhance the safety and reliability of our systems.

So overall, we're off to a good start in 2013. We're especially pleased with the performance of the Utility Group and Infrastructure Services. While challenges and room for improvement remain for all our businesses, I am confident we can successfully execute our plans for each business. And with that, I'll turn it over to Jerry to provide further comments on the quarter and our outlook for the year.

Jerome A. Benkert

Thanks, Carl. Turning to Slide 6, 2013 first quarter Utility earnings were $55.1 million or $0.67 per share compared to $56 million or $0.69 per share last year. We saw higher margins in the quarter for both our gas and electric businesses. Our gas business, we were pleased to see margin growth for the quarter, in part due to the returns earned on increased investment in bare steel and cast iron pipe replacements. On the electric side, year-over-year results benefited from about normal weather when compared to the mild weather we saw last winter. Combined with higher natural gas prices, the colder weather also resulted in our coal-fired electric generating units being dispatched at a greater rate in the first quarter this year versus last, which led to a higher variable operating cost. This increase in first quarter operating cost was in line with our expectations and does not alter our belief that we can achieve our goal of flat operating cost again in 2013.

As Carl mentioned earlier, Senate Bill 560 was just signed by the governor. We believe this Bill will assist us in successfully balancing the need to invest in our infrastructure in order to meet our safety and reliability goals with the need to earn on those allowed -- or our allowed return on those investments. Some of the key provisions of Senate Bill 560 include the ability to file a 7-year infrastructure replacement plan with the Indiana Commission whereby utilities would be able to timely recovery 80% of the investments with the remaining 20% deferred until the next rate case. The annual impact on rates will be capped at an increase of 2% of retail revenue.

Additionally, Senate Bill 560 will allow utilities to prepare future base rate cases using a forward test year and implement interim rates at 50% of the requested level if a rate case does not produce an order within 10 months of filing. The Bill also provides support for economic development activities, including such things as promoting the expansion of natural gas service in rural communities. So as you can see, Senate Bill 560 is a very supportive piece of legislation for utilities in Indiana. It really just continues the long history and support of legislation in the state related to various infrastructure investments. And as a complement to Senate Bill 251, which provides for similar recovery in Indiana for investments driven by federal government mandates. And House Bill 95 regarding infrastructure investments in Ohio, both of which were passed in 2011.

Moving on to Slide 7, and the Nonutility Group, we will start with Infrastructure Services first quarter earnings, which were greater than expected at $6.9 million compared to $3 million in the prior year, driven by the continued strong demand for transmission work. Colder than normal weather afforded the use of roads throughout the first quarter in our transmission territory, where under normal weather conditions, access to roads by heavy trucks is restricted in the latter portion of the winter and the early spring to avoid damage to the roadways as they begin to thaw. For example, these favorable conditions in the quarter enabled continued progress on an 80-mile gas pipeline project in the Bakken region. In distribution, we saw wet and cold winter weather, which led to what is a typically slow first quarter. At March 31, estimated Infrastructure Services backlog was $445 million. The $65 million increase over the December 31 estimate is attributable to better visibility and into customers' 2013 workload under blanket contracts and progress by both the transmission and distribution segment on winning additional contracts to start of the year. With the strong first quarter performance and better clarity on this summer's workload, we are increasing the midpoint of Infrastructure Services 2013 guidance to $38 million from $35 million.

Energy Services saw a first quarter loss of $1.4 million versus $1.7 million in 2012, as potential customers of Energy Systems Group continued to be slow in committing to performance contract projects. We had some success in completing additional sales during the quarter, as evidenced by the award of a second contract by the U.S. Virgin Islands to provide energy efficiency retrofit at several additional public schools.

On the renewable side of the business, in February, ESG finalized the contract to develop, own and operate the landfill gas facility in Valdosta, Georgia, which when completed, will produce approximately 5 megawatts or enough energy to power 2,000 homes annually. These are examples of the type of meaningful projects in which Energy Services excels. As Utility electric prices climb and demand recovers, ESG will be ready to compete.

Turning to Slide 8. Coal Mining suffered a disappointing first quarter loss of $6 million compared to a loss of $0.3 million in 2012. These poor results were driven by the continued challenged mining condition at our Prosperity mine, which experienced thin coal seams during the quarter, as well as a significant shut down in March due to a geological issue regarding water behind mine seals that has now been resolved. However, we were again very pleased with the performance of our Oaktown 1 mine, which continues to produce high-quality coal at a very competitive cost. Despite Oaktown 1's success, we're lowering the midpoint of our 2013 guidance for Coal Mining to a loss of $12 million due to the poor performance of Prosperity in the first quarter. Note though that April has been a month of transition at Prosperity as we have acted to improve current and future results by moving all mining units with thicker coal seams and placing into service the first lower profile mining equipment. Accordingly, we expect the average cost per ton at Prosperity to improve for the remainder of the year.

As Carl mentioned, we are pleased to announce the opening of our Oaktown 2 in April. With the additional production and new sales from Oaktown 2, we now expect 2013 total production to be approximately 6.2 million tons with sales of 6.3 million tons, which includes 500,000 tons in arbitration related to a price reopener that we hope will be resolved in the second quarter. Due to the expected higher production costs in the startup phase of Oaktown 2, we do not perceive these additional sales resulting in a material impact to the Coal Mining net income in 2013. However, our EBITDA estimate for the year is now $4 million higher. As 2013 progresses, we do expect Oaktown 2's average cost per ton to improve as the start-up phase is completed and as production ramps up.

Looking forward to 2014, we had sold 5.5 million tons, including 0.8 million tons in arbitration at an average price of approximately $46 per ton. This is a reduction of $300,000 tons sold from our prior guidance and some of the 2014 tons were accelerated into 2013 at our customers' request. Also in 2014, assuming demand dictates a ramp-up in production at our Oaktown mine, an increased percentage of overall sales from Oaktown mine should help us improve average cost per ton. On Slide 9, you will see that our 2013 guidance range of $1.90 to $2.10, excluding ProLiance. Remember that our initial 2013 guidance was the same level, but included ProLiance at break even. For the Utility, guidance is unchanged at $1.65 to $1.75 per share as we remain confident that earning at or near allowed returns is again achievable this year. And though tempered by the lower expectations around the coal business in 2013, we remain pleased with the outlook for our Nonutility group, driven by our main contributor, Infrastructure Services. Operator, that concludes our prepared remarks. We're now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Matt Tucker.

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

First question, on Infrastructure Services, obviously, a very strong quarter. I was hoping that you could give us a little sense for the trajectory going forward this year. I assume that there's some moving parts. Weather actually helped the first quarter, maybe impacted April a little bit. You got this large project going into the first half of the year, maybe just help us get a sense for -- on the trajectory from here.

Carl L. Chapman

Sure. Basically, while we do have the one large project, as we've mentioned before, we certainly have a much larger portion of our business from integrity work than from the shale work at this point. So yes, that is a large project related to shale, but we have very strong work on the integrity side and other work on the shale side. So we feel really very good. As we've mentioned, the backlog is up. And we feel good about where we are. We've raised the guidance and I think the other aspect of that is really that we would see some downturn a bit in April, as we mentioned, that we would see in April, the road restrictions kick in a bit. But we raised the guidance because we feel good about what we're seeing in the business.

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

And I guess, just a follow-up to that, typically seasonality would be such that revenues increase sequentially through the first 3 quarters of the year. Is that kind of typical seasonality going to hold true this year?

Carl L. Chapman

Well, we, of course, don't give quarterly guidance, but the first quarter was stronger than we expected, that we shared when we rolled out the guidance. We certainly expected a bit of a dip versus last year because the weather has just been so good in the first quarter. But given how it worked out, we were better than expected in the first quarter. So probably this year might be just a little bit different in transmission than a typical year. But as I said, we feel good about the guidance we've provided for the rest of the way. We just don't break it down by quarter.

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

Got it. Just one more on SB560. It certainly sounds positive for you guys. Can you talk a little bit how that is going to change your spending plans? And if it doesn't change them, maybe talk about how much of your plan that wasn't cover by recovery mechanism can now fall under this new bill.

Jerome A. Benkert

Thanks, Matt. I'll go ahead and jump in on that question. We put out CapEx plans with our February release of guidance for this year. And we were looking ahead and somewhat the -- certainly, the discussion is going on or contemplated around 560, so we're very pleased to have the order out now. That's sort of first. But secondly, still estimating those plans, if you'll consider those plans estimates, we talked about CapEx spending in the $330 million, $320 million range roughly a year for '13, '14 and '15. And what would fall under those plans, what we see falling under those plans over a 3-year period has maybe stepped up bare steel cast iron programs through 560 or otherwise through tracking in Ohio, maybe somewhere in the $200 million range over that time period. And other gas modernization spend, gas infrastructure spend maybe in the range of another $150 million. So I don't think those numbers are finalized, we're still working on it, but that may give you some ballpark overall.

Carl L. Chapman

Matt, I'd just add a little bit to that is that as Jerry said, we really think it's kind of what we were anticipating and we certainly will not plan to do more because of particular approaches in the regulatory side much more about knowing the spend we have in mind and trying to get regulatory support for that. So I would just add that caveat to make it clear that it fits right in line with what we already plan to do and feel like we need to do, given the rules and our expectations.

Operator

[Operator Instructions] Your next question come from Sarah Akers.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

On coal, the 2014 tons sold has been, I think, the $5.8 million since the third quarter of last year. I know some was pulled forward into '13 here. But can you give us any insight into the lack of contracting activity over the last 6 months, and why you think that is? And if you think it's going to pick up in the second half of the year?

Carl L. Chapman

Sure, Sarah. And I think it's really the exact same thing that we've mentioned before, although just by the amount of coal that we sold here in the last bit for '13, I think, says something about a turn to some extent. But really, what it gets into is the issue from last year, a very warm winter, coupled with some very low gas prices in 2012 really caused a number of customers, coal piles to increase. And so they're being very hesitant in the timing that they decided to buy coal. I know there's any question, the coal we sold recently indicates some change in that regard and of course, the gas prices are while still quite reasonable, are definitely up from last year, which we certainly expected. And so, I think you'll start to see the customers now start to be much more open about their future spending timelines. But it's really just because they're working through those coal piles.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Got it. And then is there any way you can give us a sense of magnitude about the potential improvement in the cost per ton in '14?

Carl L. Chapman

Yes, Sarah. That's just something that we, as you know, we've just not done yet. Obviously, we are in mining Oaktown 2 now, and it's as we would expect to see it at this point. But I think until we get further along in Oaktown 2 and have a little better visibility on volumes as we see more demand open up, we're just not prepared to share those numbers yet at this point.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Sure. And then one on ProLiance, I just want to make sure I understand. Is the reason for excluding this business from guidance just a lack of visibility or is it the fact that it's now under strategic review?

Carl L. Chapman

Well, I think it's really both, Sarah, is what we tried to say in our comments that certainly, the big issue here is that visibility has become difficult particularly for, say, the fourth quarter, as we shared before, often that occurs, but as we just continue to look at other options, as we mentioned the possibility of significant demand reductions and as ProLiance looks at it its business model. So it's really for all those these reasons as we shared.

Operator

You next question comes from Michael Gaugler.

Michael E. Gaugler - Brean Capital LLC, Research Division

Most of my questions have been answered. I do want to go back to the Infrastructure Services segment for a moment. Obviously you had a really nice backlog build quarter-over-quarter and I'm wondering if you're seeing the same type of ramp. I know we're only a month into the second quarter, but I'm wondering what you're seeing in terms of backlog here? And what -- maybe what your expectations for that are after that large project wraps up later this year.

Carl L. Chapman

Well, first of all, we obviously don't give any guidance beyond our quarter end. But we've already shared our bullishness, if you will, on the business by our increase in our earnings projection for the year and we continue to see very strong demand, shale and repair, both. And so we feel good about that. We would also just comment that while that's a large project, this is a business that we're providing guidance at this point in our appendix, that the midpoint of guidance on the revenue side is now $670 million. So any single project is not the magnitude that it once would've been for our business as we've grown it. So we feel good about the rest of the year.

Operator

[Operator Instructions] There are no further questions at this time.

Robert L. Goocher

Okay. Thank you, operator. We'd like to thank everyone for joining us on our call today. On behalf of our entire team, we appreciate your continued interest in Vectren. And for those of you attending the ATA financial forum next week, we look forward to seeing you there. With that, we'll conclude our call for today. Thanks again for your participation.

Operator

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

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