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Executives

Steven M. Schein - Vice President - Investor Relations

Niel C. Ellerbrook - Chairman and Chief Executive Officer

Vectren Corp. (VVC) Q3 2009 Earnings Call October 30, 2009 2:00 PM ET

Operator

Good afternoon. My name is Courtney and I'll be your conference operator today. At this time I would like to welcome everyone to the Vectren Corporation Third Quarter 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you Mr. Steve Schein, you may begin your conference.

Steven M. Schein

Thank you, good afternoon to everyone. On behalf of Vectren, we thank you for joining us on our third quarter call today.

Today you're going to hear from Niel Ellerbrook, our Chairman and CEO. Also joining us are several members of our management team including Carl Chapman, Jerry Benkert, and Ron Christian. This call is being webcast and copies of our earnings release and accompanying slides are available on our website.

I will like to remind you that some of the statements made on this call will be forward-looking statements and are subject to risks and uncertainties that could cause actual results to differ materially from those that are discussed in this presentation. I'd like you to refer to on this release and 10-K for more detail. And after Niel's remarks, we will open the lines for questions.

With that, I'll turn it over to Niel.

Niel C. Ellerbrook

Thanks Steve. Slide three provides a summary of consolidated third quarter results. While we have shown the second quarter Liberty charge for GAAP purposes, my remarks will focus on period-to-period changes excluding the Liberty charge. Slide 13 of the presentation provides a reconciliation to GAAP results.

Net income for the quarter was 12.4 million or $0.15 per share as compared to 23.2 million or $0.29 per share for the third quarter 2008. The significant quarter-over-quarter reduction for ProLiance was anticipated by us and we had suggested that likelihood at the start of the year.

Utility results were as expected except for a cool summer. We are generally pleased with our year-to-date results considering current economic conditions.

Consolidated year-to-date earnings were $90.4 million or $1.12 per share compared to 91.9 million or $1.18 per share in 2008. Overall our utility results continue to be impacted by recessionary pressures. But we have seen a leveling of electric industrial demand in the third quarter as compared to the prior year.

Our year-to-date non-utility business results improved by 6.6 million or $0.08 per share, even considering ProLiance's record earnings contribution of 12.4 million in the third quarter of 2008.

I would like to remind you that our earnings release provides detailed discussions regarding our operating results.

Please turn to slide four and I will provide a few comments regarding results and fourth quarter expectations for the utility. Third quarter earnings were 8.7 million in 2009 compared to 13.6 million in 2008 and the majority of the difference was the impact of the cool summer estimated at 3.3 million.

Year-to-date utility earnings were 71.5 million compared to 80.4 million in 2008. The primary factors reducing the utility year-to-date earnings were weather, lower net wholesale power margins of 6.9 million and large electric customer margins of 5.4 million related to the economic downturn. This was partially offset by increased margins related to regulatory initiatives.

During the quarter, we saw some stabilizing of large customer volume across all of our service territories. Electric large... large customer usage was better than expected and we are particularly encouraged by the expected growth of two of our top three electric customers. Berry Plastics began a planned expansion and Toyota has recently expanded its production to now include the Highlander.

Looking at the fourth quarter, for the utility we expect lower 2009 O&M spending. Partially offsetting O&M reductions will be lower wholesale margins from off-system sales. Overall we expect fourth quarter 2009 utility results to be comparable to 2008.

Before I move to the non-utility businesses, let me touch on a couple of other issues. And these would be reflected on slide five.

First, we filed a $45 million proposal with the DOE pertaining to Smart Grid. We had also filed with state regulatory request dependent on the DOE grant award. Unfortunately, we were not awarded the grant and are now evaluating a smaller scale pilot project.

In September 2008, we filed for an expanded demand side management program and lost margin recovery or often reported to as electric decoupling. Our final response was filed in August and no order has been issued to date. It now appears the commission response may direct us to a resolution through an ongoing generic proceeding or possibly through a general case filing.

We continue to evaluate regulatory options regarding our electric utility. We are achieving a return blow 8% on about 550 million of equity employed.

We remain confident in the Indiana regulation and we'll continue to work to achieve our load returns.

I will now spend a few minutes reviewing the non-utility businesses. Please refer back to slide three. Non-utility earnings were 3.3 million in the third quarter 2009, compared to earnings of 9.8 million in 2008. Year-to-date non-utility earnings were 18.7 million, compared to 12.1 million in 2008, an increase of over 50%.

For purposes of this discussion, I will focus on our three primary businesses, Energy Marketing and Services, Coal Mining and Energy Infrastructure Services.

The fourth group, other businesses includes a variety of legacy investments including investments in commercial real estates. The reduced other businesses loss versus the prior year relates to a 2008 impairment charge associated with real estate.

Slide six provides a summary of the earnings contribution from Energy Marketing and Services which is comprised of ProLiance and Vectren Source. Energy marketing and Services result, inclusive of holding company costs, was a loss of 4.8 million for the quarter compared to earnings of 10.1 million in 2008.

Year-to-date net income in 2009 was 6 million compared to net income of 12.4 million in 2008. ProLiance's operating results for the quarter were a loss of 1.6 million compared to earnings of 12.4 million in 2008. As I mentioned earlier, quarter-over-quarter and year-over-year comparable results were greatly impacted by ProLiance's 2008 third quarter earnings of 12.4 million.

These earnings were achieved during a period of very dramatic price drops in natural gas, drops from $13 to $7 allowing ProLiance for to benefit from both cash to prompt month and locational spreads and were not indicative of future results. ProLiance's 2009 results are more representative of typical operating results for the third quarter.

Source operated at a greater seasonal loss for the third quarter as compared to 2008, primarily due to higher fixed storage costs associated with increased capacity to serve a growing customer base.

This increased Source capacity helped create the exceptional opportunity the Source had in the first quarter with variable contract prices fell more slowly than the actual commodity costs.

Optimization opportunities at ProLiance are expected to drive improved fourth quarter 2009 results as compared to 2008. As we discussed through the year, as spreads began to widen, ProLiance has the significant portion of the summer to winter 2009 seasonal spread opportunity. The recognition of these seasonal arbitrage opportunities will be reflected in the fourth quarter 2009, and the first quarter 2010 as gas is withdrawn from storage.

In addition, cash to NYMEX spreads have created greater opportunities for October and later months as compared to the same period of 2008. As a result, Energy Marketing and Services' fourth quarter results are expected to improve significantly as compared to 2008.

Slide seven provides a summary of Coal Mining results. Coal Mining earned 4 million for the quarter and 7.4 million year-to-date compared to a year-to-date loss of 1.6 million in 2008.

2009 results reflect higher realized price per ton consistent with the increased pricing in new contracts effective January 1. The 2009 realized price per ton is average $51.20 compared to the average realized price of $36.01 for 2008.

Volumes sold for the quarter and year-to-date were 900,000 tons and 2.5 million tons respectively, down somewhat from 2008 sales levels of 1.1 and 3.2 million tons. Year-to-date cost per ton of coal sold rose to $44.17 compared to $36.12 in 2008, primarily due to the planned reconfiguration at Prosperity Mine, designed to achieve long-term productivity improvements of 25% to 35% and more efficiently meet MSHA requirements.

Successful mine reconfiguration work to improve yield lowered the third quarter average cost of ton sold to $41.76, a decline of $4.25 per ton from the second quarter of 2009.

During the quarter, the average cost per ton sold dropped in each month. The continued recessionary pressures and the resulting reduced demand for electricity have created demand and supply imbalances for Illinois Basin coal that may extend into 2010.

We continue to work with our customers to help them manage inventory levels and meet their needs for the remainder of 2009. We expect fourth quarter sales to be in the range of 900,000 to 1.1 million tons.

Both improved pricing and continued lower cost of production are expected to produce results for the quarters significantly higher than 2008. We believe the long-term outlook for Illinois Basin coal remains strong as coal markets are expected to rebound as the economy improves and inventory levels are reduced.

We've delayed the opening of Oak Town in the first quarter of 2010. We continue negotiations with a number of prospective customers and we'll provide an update on our next call. The Oak Town 2 mine is scheduled to open in 2011 based on projected demand.

As shown on slide eight, Energy Infrastructure Services comprised of Energy Systems Group and Miller Pipeline, contributed earnings of 4.6 million for the quarter compared to 6 million in 2008. Year-to-date net income in 2009 was 7.6 million compared to 5.5 million in 2008.

Miller earned 2.3 million in the quarter and 3.1 million year-to-date, down from 3.3 million and 3.6 million from the same period last year. The declines are primarily due to recessionary impacts related to utility customer cutbacks and third quarter start-up costs associated with three new utility contracts.

Miller has seen some increase in capital spending by its utility customers with recently announced bid opportunities on infrastructure programs including bare steel and cast iron replacement.

Energy Systems Group's earnings were 2.9 million in the quarter and 5.9 million year-to-date. This compares to 2008 earnings of 3 million and 2.9 million. The quarter-over-quarter comparison is relatively flat and the year-to-date increase reflects the second quarter 2009 sale of a landfill gas project as part of its renewable energy development strategy.

Demand for energy savings and renewables continues to increase and ESG's backlog has grown to 76 million at September 2009 compared to 54 million at the same point a year ago.

Energy Infrastructure Services' fourth quarter results are expected to be comparable with 2008 results.

Turning to slide nine, as noted on the previous slides, the key drivers impacting our expected fourth quarter performance will be the continued stabilization of large electric customers' volumes, reduction of utility operating expense, improved results of Coal Mining related to new pricing agreements that continue lower production cost and improved earnings from ProLiance capturing favorable storage opportunity.

Our consolidated earnings guidance remains unchanged at $1.60 to $1.80 per share. Utility group is expected to earn in the range of $1.20 to $1.30 and the range of $0.40 to $0.50 from the non-utility group also remains unchanged.

Before we open up the line for questions, I would like to say a few words about our dividend.

Our Board declared a quarterly dividend of $0.34 per share payable December 1st marking the 50th consecutive year of Vectren and its predecessor company with the increased dividends paid.

We are extremely proud to be part of a select group of companies that have achieved this level of long-term commitment to our shareholders. 50 years is quite a record but the decision to increase again was driven by our belief that we can sustain and continue to prudently grow the dividend.

While the economy is clearly challenging as we head into 2010 and beyond, we believe growth in our core businesses combined with our current yield of about 6%, provide an excellent total return opportunity.

Operator that concludes our prepared remarks and we would welcome questions.

Question-and-Answer Session

Operator

All right. (Operator Instructions) You have no questions at this time.

Steven Schein

Okay. Operator if there are no questions, then we'll conclude our remarks here. For those who will be still on the call we appreciate your participation by all means and for those of who are going down to EI, we'll look forward to seeing you. Vectren is a great story and we hope you stay tuned. Thank you operator, that concludes the call.

Operator

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

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