Vectren Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Vectren Corp (VVC)

Vectren (NYSE:VVC)

Q2 2013 Earnings Call

August 01, 2013 2:00 pm ET


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


Andrew Levi

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

Michael E. Gaugler - Brean Capital LLC, Research Division

Sarah Akers - Wells Fargo Securities, LLC, Research Division


Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vectren Corporation 2013 Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Robert Goocher, Treasurer and VP of Investor Relations. Sir, you may begin.

Robert L. Goocher

Thank you, operator. Good afternoon, and thank you, each of you, joining us on today's call to review Vectren's 2013 second quarter results. This call is being webcast and shortly following its conclusion, a replay will be available on our website at, under the Investors link at the top of the page. Yesterday, we released our 2013 second quarter results. And this morning, we filed our 10-Q. Copies of the earnings release, today's slide presentation and the 10-Q can be found under the Investors link as well.

As further described on Slide 3, I would like to remind you that many of the statements made on this call will be forward-looking statements. Actual results may differ materially from those discussed in this presentation. Carl Chapman, Vectren's Chairman, President and CEO, will provide opening comments on quarterly results and our outlook for the rest of the year. 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 earnings guidance.

Also joining us on today's call is Ron Christian, Executive Vice President and Chief Legal and External Affairs Officer. Following our prepared remarks, we would be glad to answer any questions that you may have. With that, I'll turn it over to Carl.

Carl L. Chapman

Thanks, Robert, and I'd like to welcome everyone to today's call. And as always, we appreciate your interest in Vectren.

You'll see on Slides 4 and 5, Vectren's second quarter consolidated earnings, excluding results of ProLiance, were on plan at $27.1 million or $0.33 per share, compared to $30.8 million or $0.38 per share during the second quarter of 2012, a decrease that we anticipated, based on reduced contributions from our Coal Mining business.

Utility earnings though, were up nearly $4 million or $0.05 per share for the quarter versus last year, primarily related to increased gas utility margins and lower interest expense, which more than offset the lower electric margins in the quarter caused by milder weather this quarter versus last year. I'm happy to report our Utility Group remains on track to earn at or near overall allowed returns again this year.

Nonutility earnings, excluding ProLiance, were $3.2 million in the quarter versus prior year earnings of $10.9 million. As expected, lower Coal Mining results in the quarter were principally responsible for the decline, though second quarter results from Coal Mining did improve compared to the first quarter of this year. On the other hand, our Infrastructure Services business continued to perform very well, delivering $8 million of earnings in the quarter, nearly matching last year's strong second quarter.

As we reported in June, ProLiance exited the wholesale natural gas marketing business by disposing of certain of its net assets, along with its long-term pipeline and storage commitments. As a result of this transaction, Vectren recorded its share of the loss on the disposition, termination of the long-term pipeline and storage commitments and related transaction and other cost, totaling $43.6 million pretax or $26.8 million net of tax, which is within the range we reported in June when the transaction was announced.

I've said before, the big picture here is that ProLiance transaction demonstrates the execution of our Nonutility strategy of less reliance from commodity-driven businesses for future earnings growth, and more on investing in and growing our Infrastructure Services and Energy Services businesses. This, coupled with our core Utility business, which always will be our primary focus and majority contributor of earnings, will help us achieve consistent earnings growth at a target of 4% to 5% annually.

Overall, our outlook for the remainder of 2013 is very positive. Our core utility businesses continue to perform well with modest margin growth and continued focus on managing O&M and interest cost.

Infrastructure Services continues to lead the Nonutility Group with another great year well underway, and with an opportunity to match 2012's record year. And while our Coal Mining results are down from the prior year, we should see improvement throughout the remainder of 2013 as our lower cost Oaktown mines become a larger part of overall production, coupled with some productivity improvements at Prosperity.

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 second quarter Utility earnings were $24.2 million or $0.29 per share, compared to $20.1 million or $0.24 per share last year. Results were positively impacted by lower interest expense, by small and large customer margin growth on the gas side of the business, by continued growth in returns earned on the increased investment in bare steel and cast iron pipe replacements, particularly in Ohio. O&M cost were also somewhat lower for the quarter compared to 2012, but primarily due to timing of expenses related to electric generation.

Last week, Vectren Utility Holdings successfully priced $150 million of utility-related 10-year senior unsecured notes at a very attractive rate of 3.72%, and is utilizing a delayed draw feature. As a result, the net proceeds will be received on December 5, 2013. This new debt allowed us to permanently refinance an existing $100 million note at 5.25% that matured today, and the remainder will be used to fund the utility capital expenditures and other general corporate needs.

When coupled with the utility financings or refinancings completed in the last few years, we continue to expect significant annualized interest savings in 2013 and beyond. Utility interest expense for 2013 is on track to come in at or below our initial target of approximately $68 million, which is down substantially from the $80 million of utility interest expense in 2011.

In July, Vectren filed notice with the Ohio Commission of our intent to accelerate our bare steel/cast iron replacement program and make additional investments in gas infrastructure in the state. In early August, we expect to file our request for the additional levels of gas capital expenditures starting in 2014, and for current recovery of those investments under Vectren's existing distribution replacement writer mechanism.

In Indiana, we expect to initiate filings related to additional infrastructure investments under Senate Bill 560 and 251 later this year. In preparation for these filings, we are currently evaluating the timing and the size of accelerated bare steel/cast iron replacement programs and additional gas infrastructure improvements at both of our Indiana gas utilities.

Moving on to Slide 7, in the Nonutility group. Infrastructure Services provided another outstanding quarter where second quarter earnings were $7.9 million compared to record level earnings of $8.4 million in 2012.

Transmission work continues to be strong and in high demand for us, driven primarily by pipeline integrity work. In addition, the 80-mile gas pipeline project in the Bakken region that we have spoken about in past quarters is now substantially complete and on plan. Demand for distribution work also remains strong, despite being somewhat hampered by the cold weather to the start of the year and a wet year thus far.

Overall, we are very enthusiastic about the near-term and long-term prospects for Infrastructure Services. Given the backlog -- given the third quarter traditionally being the stronger for construction work, and with our very nice 2013 first half performance, as Carl mentioned, we believe that for the full year in 2013, Infrastructure Services has the opportunity to match their record 2012 earnings levels.

Energy Services saw a first quarter loss of $800,000 versus breakeven in 2012. We expect results in the second half of 2013 to be stronger and include additional energy efficiency tax deductions to keep us on plan for the full year.

Overall, the traditional performance contracting market, which includes municipals, universities, schools and hospitals, or MUSH markets, remain slow. However, we are in the final stages of the bidding process on several new performance contracting projects, including some that are of significant size. We also see a lot of promise for additional performance contracting in the federal market, such as with work being done on military bases where projects are continuing to be driven by U.S. government initiatives like the better buildings initiative.

On the renewable side of Energy Services, we anticipate startup of our previously announced landfill gas facility in Valdosta, Georgia later this year, which is expected to produce approximately 5 megawatts or the equivalent power used by approximately 2,000 homes per year.

On Slide 8, Coal Mining produced a second quarter loss of $3.7 million compared to earnings of $2.5 million in 2012. Overall cost per ton declined compared to the first quarter, as productivity and prosperity improved on somewhat thicker coal seams and better mining conditions, though significant improvement is still needed to return this mine to profitability.

In addition to other changes we have implemented, in early August, the second set of low profile mining equipment will be in service to further improve productivity.

Operations at our Oaktown mining complex are now in full swing. Oaktown 2 successfully opened in April, and the startup has been very promising. Production has quickly ramped up as both Oaktown 2 mining units were in service starting in early July.

And finally, Oaktown 1 continues to provide very competitive cost per ton when compared with other room and pillar mines in the Illinois Basin. And our expectations are that cost at Oaktown 2 should be similar to Oaktown 1 as it reaches full production later this year.

Also in the second quarter, we were able to come to a favorable conclusion to the tons in arbitration. The outcome resulted in a reduction of tons to be delivered in 2014. However, those reduced tons will be added to tons delivered in 2015 and 2016, at much higher prices.

So as things stand now, we have 6.3 million tons sold for 2013. And with the potential of additional spot sales, we now expect production of approximately 6.3 million tons and sales of approximately 6.5 million tons in 2013.

For 2014, we currently have 5 million tons sold at approximately $46 per ton on average. We have plans for production and sales of approximately 7.3 million tons in 2014, depending on demand. We believe this is the level of production that can be achieved without significant overtime based upon the excellent performance we've seen at Oaktown 1, and the encouraging results to date at Oaktown 2.

Our target then over the rest of the year is to secure sales contracts for an additional 1.2 million to 1.6 million tons in 2014. This would put us in the 85% to 90% range of tons sold, leaving some amount open for spot sales and any fluctuations in production.

Though customer coal piles are going down, utilities are still being cautious in their buying and some decisions continue to be delayed. However, based upon current discussions and expected bidding, we see opportunity for volumes which would easily exceed our targeted additional sales for 2014, although at somewhat lower prices than the $46 average for the 5 million tons already sold.

Given the 2014 targeted production and sales of 7.3 million tons, we expect a higher percentage of sales from the Oaktown mines, which along with cost-reduction efforts at Prosperity Mine, should reduce the total average cost per ton. We believe that execution of this plan will lead to significantly improved coal mining results in 2014 and beyond.

Moving on to Slide 9, and the ProLiance transaction that Carl described earlier, we won't go into much additional detail on today's call. But for more information on the ProLiance exit, you can refer back to the materials presented in June, and to our second quarter 10-Q, that, as Robert mentioned, was filed today. ProReliance, of which Vectren has a 61% ownership, exited its natural gas marketing business due to disposition of assets to Energy Transfer Partners. The exit also provided for assignment or termination of all obligations related to ProLiance's firm, transportation and storage commitments.

The exit resulted in a loss at the ProLiance level of $64.2 million, which is within the range that we expected at the time of the transaction. Vectren's share of the loss on the transaction was $26.8 million after tax, or $0.33 per share. Vectren's portion of the year-to-date operating losses was $0.13 per share, which is comparable to last year, with no further operating losses expected to occur. Net effects of the transaction including tax benefits were modestly cash flow positive at the Vectren level.

Vectren's remaining investment in the ProLiance midstream assets and working capital is approximately $32 million. This relates primarily to the interest -- to the minority interest and a joint venture with Sempra Energy in the LA storage project, and to a lesser extent, the remaining value from smaller storage and pipeline assets.

Finally, on Slide 10, we were on plan for the first half of the year and expect that trend to continue. You will see we have reaffirmed our consolidated 2013 guidance range of $1.90 to $2.10 per share, excluding ProLiance. With the ProLiance transaction complete, no further operating losses are expected to occur. Since ProLiance has exited the gas marketing business, and the operating results only reflect a partial year, including a time when the business was operated differently, as the exit approached, we believe these operating losses are not meaningful when compared to prior periods, or our future without gas marketing. And so we are excluding them, along with the loss on exit from ProLiance.

For these same reasons, we would encourage investors to consider this approach as well.

We're also affirming our Utility guidance range of $1.65 to $1.75 per share, and our Nonutility guidance range, excluding ProLiance, of $0.20 to $0.40 per share, primarily based on the continued solid performance of our Utility Group, and the strong demand for services provided by Infrastructure Services.

Operator, that concludes our prepared remarks, and we are now ready for questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Andy Levi from Avon capital.

Andrew Levi

Just a quick question on the coal, for '14. So again, I know you haven't given formal guidance for '14, but it sounds like you guys can probably get pretty close to breakeven on the call, is that kind of what you're saying?

Carl L. Chapman

Well, as you mentioned, we've not given the guidance at this point. What we have done is try to give you some guidance on -- again, subject to the sales, but we think the demand is there. But obviously, the sales have to occur, but subject to that, we've tried to give you guidance that we're going to step up the tons and we would be moving more of the tons, in essence, as a percentage, to Oaktown Complex and we would hope to improve on Prosperity. But we've not given specific guidance on what that actual results would be at this point.

Andrew Levi

I think in the past, tell me if I'm right or wrong in here, didn't you guys give metrics on kind of how you get to breakeven? If so, could you just remind us on that, and if not, I apologize.

Carl L. Chapman

I don't recall us giving separate metrics on breakeven. But again, the key issues are the ones that I just went through, the first one is that we step up the tons, the plan to get there whenever that timeframe would be, step up the tons, two, lower cost at the Oaktown mines versus Prosperity. And we also share cost between Oaktown 1 and 2, which means there are some additional savings there as we do that. And then three, reduce the cost at Prosperity. So those -- I don't think we've given separate calculations on those.


Your next question comes from the line of Matt Tucker from KeyBanc Capital Markets.

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

I guess, I'll start following up on the coal side. Could you give us a little more color on what's going on with Prosperity? The productivity and cost issues have been there for a while and you've been implementing a plan for a while. Have things been moving at the pace that you expected? And with the changes you anticipate making in August, will that kind of complete this plan that you've been pursuing to address those issues?

Carl L. Chapman

Well, Matt, I think that the answer is that we are disappointed and that we've continued to experience some of these issues. We've mentioned before about a thin seam and we've had some thin seam, which has been a bit different than what actually our core sampling would have shown. We have continued to move the various miners, the mining equipment, into what we believe should be better seams. We've shared before that we also have some low-profile mining equipment. The first round of those arrived earlier this year, second round arrives in August. And we will continue to focus on that. We've done a lot of other things as well. We continue to focus on supervision that has experience in lower profile and there's a number of other things we've gotten approval from MSHA for, for example, glue bolts and some other things that we continue to focus on. So we are hopeful that the changes that we've made will improve the cost. And on the other hand, you're correct, it has been a period of time where we've continued to see some of these issues. But we are hopeful that given the changes that we've made and will continue to make here over the next few weeks, we're hopeful that we'll see some improvement.

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

Okay. And then switching to the Utility side. You -- as I recall, you've been referring to your pipe replacement programs has accelerated before this, before today. Now you're talking about filing for, I guess, additional acceleration of those plans? Could you give us a little more color, maybe quantify how much you'd like to accelerate beyond what you are already contemplating? And if these filings are accepted by the regulators, does that suggest upside to your CapEx plans? If you could give us some thoughts about the timing on acceleration as well, that would be helpful?

Jerome A. Benkert

Good questions, Matt. And I'd say there'll be more to share in the next quarter or 2 for sure. We've certainly shared some CapEx numbers that have stepped up some. And so that kind of data is out there, we could provide it again. Having said that, we haven't refined the final estimates for these filings. Now I mentioned the one in August that's already been noticed up. So that filing will be made in the very near term. At that point, it's public and we'd certainly be able to share those numbers and how fast we're accelerating the bare steel/cast iron and the other dollars that we're moving into that filing. So that will be available probably in the next month or so. But having said that, we'd rather not announce it prior to filing it with the Commission. In Indiana and Ohio, I'd say even though we have higher numbers in our CapEx plans currently, that we've shared previously, those filings, as I mentioned, are still under study. And even now, we're taking a closer look at some of the dollars. So I think the reality here is these plans have been developing. The utilities are earning very nicely now. We see the filings taking place in the very near term over the next 2 quarters. At that point, it all becomes public, and it will be much easier for you to work into your models.

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

And just one more follow-up on the infrastructure side. Obviously, a very strong first half. Could you give us a little color on the bidding activity, maybe versus this time last year? And in particular, with this large Bakken project winding down, are there any other large transmission type projects that you see on the bidding radar?

Carl L. Chapman

Sure. I think the activity is very strong, just as it was last year. And it's really in both areas. On the transmission side, it's on the whole issue of integrity management driving a lot of the big pipes to do work, and then also shale opportunities. And I'll come back to the large project in a second. I think, on the distribution side, again, driven by a lot of bare steel/cast iron acceleration, just as Jerry was talking about with us, and also work that will come from a lot of different modernization programs throughout the various abilities. We do see opportunities for new build. We don't necessarily desire large projects. We're very happy with the project that we had. It's nearly complete. It's a good project for us. On the other hand, we're very interested in continuing business with the various parties, particularly in the Bakken. So we're willing to look at large projects, we're really more interested in ongoing work where we're developing relationships with producers that are going to have routine spend for a long time. As we've said before, we think this is a very long cycle we're in. So there are big opportunities. On the order hand, we're just as satisfied with small wins that add up to the same. We've got a workforce working right now that's actually approximately the same as last year, although a little bit stronger. And we think that we're able to keep our workforce very busy with the opportunities we have.


Your next question comes from the line of Michael Gaugler from Brean Capital.

Michael E. Gaugler - Brean Capital LLC, Research Division

Some of my questions already have been answered. I wanted to kind of swing back to coal mining for just a moment. You mentioned, in some detail, the production ramp going on at Oaktown 2, and I'm wondering kind of where you are in that process. Is the hiring basically done and you kind of hit full stride there in the third quarter or was that more of a yearend type of scenario?

Carl L. Chapman

Yes. What we try to share was that we do now have -- both units are now what's called super sections, or just call it the boat units are now prepared for full production. We clearly have some ramp up that is continuing as we've done that. And we do believe that the cost structure will continue to improve throughout the year.

Michael E. Gaugler - Brean Capital LLC, Research Division

And then, I'll switch over to infrastructure for a moment. I'm wondering if you're seeing any changes in any specific end markets, either getting a little weaker or getting a little stronger, plus your customer base there?

Carl L. Chapman

I don't think we really would believe we've seen a lot of change. I think it's been very strong on both the distribution and the transmission side. And so as I mentioned earlier, very strong at this time last year, and we think continues to be strong now.

Michael E. Gaugler - Brean Capital LLC, Research Division

Then just a really quick one on the utility ops. I saw your interest expense dropped off pretty dramatically in the second quarter. And I'm looking at that and the run rate to get to your $68 million target, give or take, and I'm wondering, was there a onetime item in the quarter associated with refinancing that kind of pulled that number down? And what would be a normalized run rate?

Jerome A. Benkert

Michael, I guess, we've given the estimate of the initial guidance of $68 million for the year and said that we can match or maybe come in below that. Related to just looking at the specific quarter, we have called in some tax exempt debt, we're putting it out over time. So there may be some occasions where we have some short-term financing as we do some of our refinancing. But overall, this is on plan, maybe a little bit favorable to plan.


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

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Just a couple of follow-ups on coal. First, a question on the much higher price comment for the tons that were in arbitration. Is that reflective of market prices in '15 and '16? Or you're getting a premium to market because of the deferred timing for those tons?

Carl L. Chapman

No. That pricing that we achieved we would believe would be market, obviously was a part of an arbitration. So it really is just at the later years we think do have some increase.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Got it. And then, you mentioned that future 2014 coal sales may be at prices lower than $46 per ton, if I heard correctly. Is that just reflective of weakening market since the current '14 contracts were inked? Or what's behind that lower pricing expectation?

Jerome A. Benkert

Yes. As you know, contracts would be entered in all different time periods and there would have been some weakening in the market, which is really primarily still all driven by what happened in 2012, with the really low gas cost, which then caused coal piles to increase at a number of our customers, as well as most electric utilities. And so that's still working its way through the market, if you will. And of course, also, coal still very closely tied to gas. And there's been some drop recently, not a huge drop, but some drop. And so it really depends on the timing and a lot tied also to where gas is at that time.


[Operator Instructions] And there are no further questions in the queue at this time. I'll turn the call back over to Mr. Goocher.

Robert L. Goocher

Thank you, operator. We would like to thank everyone for joining us on our call today. On behalf of our entire team, we appreciate your continued interest in Vectren. With that, we'll conclude our call for today. Thanks again for your participation.


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

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