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Vectren (NYSE:VVC)

F4Q2013 Earnings Call

February 20, 2014 2:00 pm ET

Executives

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

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

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

Analysts

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

Brian Brazinski - BofA Merrill Lynch, Research Division

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Paul Patterson - Glenrock Associates LLC

Andrew Levi

Operator

Good afternoon. My name is Bobby, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Vectren Corporation 2013 Earnings Call. [Operator Instructions] Thank you. Robert Goocher, Treasurer and Vice President of Investor Relations, you may begin your call.

Robert L. Goocher

Thank you, operator. Good afternoon and thank all of you for joining us on today's call to review Vectren's 2013 results and discuss 2014 guidance. This call is being webcast and shortly following its conclusion, a replay will be available on our website at vectren.com under the Investors link at the top of the page.

Yesterday, we released our 2013 results and our 2014 guidance, and this morning, we filed our 10-K. You can also find copies of the earnings release, today's slide presentation and the 10-K on our website, again, under the Investors link.

As further described in 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 results for 2013, and then introduce our 2014 earnings guidance. He will then provide some thoughts on Vectren's operating strategies and financial goals before turning it over to Jerry Benkert, Executive Vice President and CFO, who will discuss 2013 results in more detail and will provide further insights into our expectations for 2014. Also joining us on today's call is Ron Christian, Executive Vice President and Chief Legal and External Affairs Officer; and Susan Hardwick, Senior Vice President of Finance. Following our prepared remarks, we will be glad to answer any questions you may have. 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. As always, we appreciate your interest in Vectren.

Overall, this past year has proven to be very successful, evidenced by the results of our Utility operations and Infrastructure Services Group. So let me start by taking a moment to thank the employees of Vectren and our subsidiaries who worked hard on executing our growth strategies in order to make 2013 another outstanding year. These efforts have kept Vectren on track to serve our customers in a safe and reliable manner, and to meet our goal of consistent earnings growth.

With that, we'll start by turning to Slides 4 and 5 to discuss our 2013 results. I'm pleased to report after a strong close to the year, full year 2013 earnings, excluding the results from ProLiance, were $2.12 per share, exceeding the top end of our guidance range and growing nicely compared to results of $1.94 per share in 2012. In June, ProLiance exited the gas marketing business and as such, the impacts of ProLiance on 2013, the year of disposition, have been excluded for comparison purposes throughout our presentation. Our Utility Group had another solid year, producing 2013 earnings that were up $0.04 per share versus 2012 results. Higher electric earnings and lower interest expense drove the continued year-over-year growth.

In 2013, we made significant progress on our strategic plan for gas infrastructure investments in both Indiana and Ohio. In Ohio, we filed a 5-year plan for acceleration of bare steel/cast iron replacement, an additional gas infrastructure improvements, which was approved just yesterday. The order provides for the extension and expansion of the distribution replacement writer through 2017. In addition, we have received approval under House Bill 95 to recover our remaining 2013 capital expenditures.

In Indiana, we filed a 7-year plan under Senate Bill 560 and 251, seeking timely recovery of capital investments in gas infrastructure. The planned gas investments in these filings set the stage for the future, and Jerry will give more details shortly. In advance of these additional infrastructure investments, we successfully refinanced $338 million and financed $48 million of additional Utility-related long-term debt in 2013 at very attractive rates. These efforts build upon recent actions that reduced Utility interest expense $7 million year-over-year and $15 million annually from levels at the end of 2011.

Nonutility Group 2013 earnings were $33 million compared to 2012 earnings of $21.7 million. Our Infrastructure Services business had another record year, driven by strong demand in project execution, delivering 2013 earnings of $49 million compared to 2012's record of $40.5 million. Energy Services results were $1 million, as that business continues to invest for future earnings growth, yet managed overall staffing levels in light of currently soft market conditions.

At our Coal Mining Group, we were successful on opening our Oaktown 2 mine and ramping up production at both Oaktown mines to planned production levels by year end, which sets the stage for significant improvement in 2014. However, 2013 results were a loss of $16 million compared to a loss of $3.5 million in 2012, primarily from the adverse effects of weak demand in pricing and mining issues at our Prosperity Mine. Our productivity improvement initiatives implemented throughout 2013 at Prosperity are paying off though, and we expect to see this more clearly in 2014's results.

And finally, in June, ProLiance exited the natural gas marketing business continuing our commitment to reducing the impacts on earnings from volatile energy commodity prices in our Nonutility portfolio of businesses. I would also like to mention that Vectren's board once again increased the dividend in 2013, extending the record of increases to 54 consecutive years.

Moving on to Slide 6. We are initiating 2014 consolidated earnings guidance at a range of $2.15 to $2.35 per share, resulting in the midpoint of $2.25, somewhat above our consolidated earnings growth rate target of 4% to 5%. We expect 2014 Utility earnings to be in the range of $1.70 to $1.80 per share, driven primarily by increased margin from recovery of our gas infrastructure investments and continued efforts to control and hold O&M flat.

Nonutility results are expected to be in the range of $0.45 to $0.55 per share, driven primarily by expectations of continued strong demand and execution by our Infrastructure Services group, as well as much improved performance at our Coal Mining operations.

In a few minutes, Jerry will provide you with more details on our 2014 outlook. But before that, I'd like to share a few thoughts on Vectren's strategies and value proposition. If you have followed us for very long, Slide 7 will look familiar. These are the core operating strategies we focus on everyday to consistently grow earnings and achieve our financial goals. Our overarching Utility goals continue to be earnings growth of approximately 3%, while meeting the needs and expectations of our customers. To achieve this, we will continue to focus on the following key objectives: the first is to continue earning our allowed return. A key element of this strategy is to timely earn current returns on a high percentage of our new investments in bare steel/cast iron replacements and other gas infrastructure replacement, as allowed by legislation and regulation in Indiana and Ohio. In addition, we must continue to aggressively control operating costs through performance management initiatives and strategic sourcing. And we will continue recover loss margins in both our Gas and Electric territories through approved regulatory mechanisms.

The second key objective of our Utility growth strategy is to focus resources on gas system infrastructure replacement, while enhancing system reliability and public safety. Again, Jerry will cover in more detail our recent Gas and Electric infrastructure filings.

We will continue to reinvest earnings to support these investments and have no plans to issue additional public equity beyond our small BRIC [ph] program. When appropriate, modest debt issuances will cover financing needs, but we continue to place a high value on maintaining strong internal cash flow generation.

On the Nonutility side, our goal is earnings growth of 10% annually. To achieve this, Infrastructure Services and Energy Services will continue to be the key drivers of long-term growth. With the exceptional growth Infrastructure Services has achieved over the last several years, the challenge will be continued expansion of our footprint in this rapidly developing market and managing this growth well.

Given our successful track record, I am confident we can continue to grow this business through long-term customer relationships, high-quality construction and customer service, and investing in CapEx for organic growth or on occasional strategically placed acquisitions.

And Energy Services will continue to grow through expansion of the performance contracting geographic footprint, focusing on the expanding federal market in growing the sustainable infrastructure business, including, for example, distributed generation and renewable energy.

For our Coal Mining business, the primary focus will continue to be the safety of each and every one of the miners working at our mines, while operating at a competitive cost.

Operationally, we'll continue to ramp up the full production at our second Oaktown mine and continue to drive down costs through productivity improvements at Prosperity.

Overall, I am confident in the management teams we have in place to execute these strategies and believe we'll see continued success leading our growth targets.

Slides 8 through 11 are just a bit reflective, but I believe they demonstrate some of the success we've achieved in recent years that give me personal pride in our people and build the case for a favorable future and valuation. The graph on the top of Slide 8 demonstrates the overall success Vectren has had in recent years, executing these strategies to achieve consistent earnings growth. We expect the annualized growth rate and consolidated earnings since 2010 to be over 8% when including our 2014 guidance midpoint. The bottom graph shows our commitment to growing the dividend, which is now providing a yield near 4%, and a payout ratio near our 65% target. We're very proud to be a part of a select group of publicly-traded companies that have achieved this level of long-term commitment to shareholders.

While we are not targeting growth of 8%, this is a great record. And the recent annual improvements and our payout ratio to our targeted plus or minus 65% range provides the opportunity to consider an increase in our rate of dividend growth in the future.

On Slide 9, you will see that our consolidated earnings are anchored by our core Utility franchise, which provides approximately 80% of our consolidated earnings, and has produced an earnings stream that has grown just above our 3% target. Accelerated investment in gas infrastructure over the next half decade will drive growth in gas utility rate base.

Since we expect timely recovery of a significant portion of these investments and no significant new equity, we should continue to be able to earn our long return and continue to consistently grow Utility earnings.

Turning to Slide 10. Vectren's Infrastructure Services business has been the anchor of our Nonutility segment in recent years, achieving excellent earnings results that we have invested in both organic growth and growth through acquisitions, particularly, of course, with Minnesota Limited in early 2011. The distribution and transmission businesses have each demonstrated strong growth as the demand for pipeline construction, both repair and replacement, has been very strong and is expected to be so for many years to come. Additionally, the management team at Infrastructure Services has done a great job of managing growth, especially in hiring and retaining employees in the field, who are the key factor in the successful bidding and project execution. In fact, the Infrastructure Services employee count has doubled to nearly 3,400 at peak in 2013.

So in summary, on Slide 11, we believe Vectren is well positioned to achieve a premium valuation from investors. First, as seen on the last couple of slides, we have demonstrated our ability to consistently grow consolidated earnings over the last several years. This, combined with our long history of dividend growth, provides confidence and the foundation for expectations of achieving our stated total shareholder return target of 8% to 10% in the coming years.

Second, we believe this success is anchored by our premier Utility franchise, which is expected to contribute approximately 80% of annual consolidated earnings.

Utility earnings growth is expected to be driven by significant gas infrastructure investments that will recover timely through constructive Utility legislation and regulation in our Indiana and Ohio service territories.

Third, we've demonstrated our ability to execute our strategy of reducing our reliance on earnings from commodity-sensitive businesses, thus, reducing volatility of earnings, and instead, focusing on our successful pipeline construction in Energy Services businesses to drive overall Nonutility earnings growth.

Finally, Vectren's strong balance sheet and liquidity profile are reflected in our credit rating at Moody's and S&P, a strength that was recently validated by Moody's with our one notch upgrade.

With that, I'll turn it over to Jerry to provide further details on 2014 guidance and the outlook for each business group. Jerry?

Jerome A. Benkert

Thanks, Carl. Moving on to Slide 12, the midpoint of our 2014 Utility net income guidance range is $145 million. The increase over 2013 is driven in large part by additional margin recovery on infrastructure investments, primarily related to our gas systems and continued efforts to hold O&M flat. Before I get into more specifics on our Infrastructure investments in the next couple of slides, I would like to make a few comments on O&M.

Our stated goal for the past few years has been to keep O&M relatively flat, targeting the range of $275 million to $285 million annually. Working within the range allows us some annual variability to manage projects, including planned electric generation maintenance. This strategy worked well in 2013 as we were able to accelerate some future projects, while still keeping within our target range and meeting our earnings goal. It also helps set us up for lower expected O&M expense in 2014 and in 2015.

Let's turn to Slide 13 and move on to the topic of planned gas Infrastructure investments. In November 2013, we filed our Indiana gas infrastructure cost recovery request, seeking recovery of capital investments under Senate Bills 560 and 251, which are now subject to review its approval by the Indiana Commission. As part of our filing request under Senate Bill 560, we filed the required 7-year infrastructure plan. All together, these plans reflect estimated construction cost of $865 million over a 7-year period, 2014 to 2020, that will result in significant and accelerated enhancements to portions of our gas infrastructure system. Senate Bills 560 and 251 allow for timely cash recovery of 80% of depreciation, operating costs and full return, and 20% cash deferral treatment of such costs until the next base rate case. The first order in Indiana for NiSource orders has now been issued under Senate Bill 560. The issuance of this order sets the stage as to how the process will likely work in Vectren's pending case. We believe our filings under Indiana legislation are generally consistent with the findings in the NiSource Electric order. A hearing in our case is scheduled for April 15th and we expect an order in the latter half of 2014, which would be generally consistent with the timing we have seen. We expect to begin income statement recognition of 100% of these capital investments once an order is issued.

In Ohio, we filed on August 2013, for a 5-year extension to recover cost for the acceleration of bare steel/cast iron replacement programs and additional gas infrastructure improvements, totaling $187 million for the period of 2013 to 2017. I'm pleased to report that the commission approved our investment plan just yesterday, effective immediately. As expected, we were granted current cash recovery of costs related to these investments, including a full return under this extension and expansion of our existing distribution replacement rider mechanism.

Finally, Vectren's -- sorry. Also, on the Ohio, we received commission approval to recover the remainder of our full 2013 CapEx budget permitted under House Bill 95, where recovery is in the form of deferral treatment for depreciation, property taxes and debt-related post and service carrying costs until the next base rate case. We expect this approach of annual filings under House Bill 95 for the nontracked portion of our CapEx investment to continue in future years.

Moving on to Slide 14. Last month, we filed with the Indiana Commission a request seeking approval for upgrades of our existing emissions control equipment on our electric generating units under Senate Bill 251. We expect to spend a total of $70 million to $90 million related to EPA mandate, including the mercury and air toxins standards, or MATS, that will take effect in 2016. While Indiana legislation provides for immediate cost recovery of federally mandated projects, we are requesting a deferral approach for these electric investments that will postpone cash recovery and will mitigate the near-term impact to customer bills. We are requesting cash recovery starting in 2020, which is time to be in conjunction with the end of cash recovery on other unrelated deferrals in 2019.

We do, however, expect to begin income statement recognition of these investments in the second half of 2014, including a return on investment and deferral of the relating costs once we have approval from the commission.

Before we move on to our Utility CapEx overview, I want to be clear that our strategy for the electric business over the next several years is to invest and recover cost in a way that mitigates the impact to our electric customers bills, which are currently higher-than-average in Indiana, due to our extensive investment in pollution control equipment and reliability upgrades over the last decade. In fact, these previous investments are why we now have such a manageable CapEx level over the next few years to comply with EPA mandates, such as MATS, and why we anticipate lower expenditures than many electric utilities for hardening their systems.

Our electric and gas customers in southern Indiana do benefit from our low natural gas rates, which are the second lowest in the state. An important factor that we are very focused on as we make investment and recovery decisions, such as those just mentioned, as well as the required gas infrastructure investments in the coming years. Based upon our current projections, we expect electric rate base to be relatively flat over the next several years.

We continue on to Slide 15 with a look at our forecasted Utility CapEx for the next 5 years. As you can see in the table, and as we've already discussed, we expect Utility growth to be driven by investments primarily in gas infrastructure. As related in the bottom of the table, 60% to 70% of those investments are tied to recovery or deferral mechanisms.

Moving on to Slide 16. You will see the detail of our 2014 Nonutility Group guidance midpoint of $41 million or an $8 million increase over 2013 results that exclude ProLiance. The primary driver of our Nonutility earnings in 2014 will again be strong performance by our Infrastructure Services Group. In 2013, Infrastructure Services saw tremendous growth, providing another year of record earnings. In 2014, we are looking for another strong year as pipeline construction demand remains strong and will give us an opportunity to match last year's record performance. The other key driver to our Nonutility guidance is the significant expected improvement at our Coal Mining operations. As you will see in the moment, we have approximately 90% of the 7.6 million tons of 2014 expected sales already sold at an average price above 2013. And we believe a full year of production from both Oaktown mine, along with improved productivity at the Prosperity mine, will significantly drive down production cost per ton in 2014.

Finally, as we always do, we have included the metrics for each of the businesses in our appendix that provide further detail behind our net income expectations for the year.

With that, let's turn to Slide 17 and review our expectations for Infrastructure Services. The long-term demand outlook for pipeline construction work continues to be strong and provides plenty of opportunity to grow this business for the foreseeable future. In 2014, we expect smaller projects throughout the year to replace the earnings from the $80 million -- or 80-mile pipeline project, of which a majority was completed in the first half of 2013.

Infrastructure Services had approximately $535 million of estimated backlog at December 31, 2013, up modestly from $505 million at September 30, 2013. As a reminder, you can refer to our appendix for a description of how we have estimated backlog. Overall, the management team in Infrastructure Services has received better insight from customers of expected 2014 workload going into the year, particularly from large transmission customers. This insight has helped us establish our expectations for 2014 gross revenues of approximately $800 million, which we feel good about when compared to our estimated backlog of $535 million. However, we recognize we still must secure over $250 million of business during the year to meet our revenue target, and the poor weather that will impact first quarter results isn't helping in that regard. And despite the slight decrease in revenues in the fourth quarter of 2013 compared to 2012, which can be attributed to the weather and the absence of the $80 million -- mile project in Q4 of 2013, we are confident that there is enough demand to match 2013's record earnings in 2014.

Taking a step back, as shown on Slide 8, this business has achieved extraordinary growth since 2010. We believe more representative of future earnings growth though from this strong contributor is the roughly 10% average annual growth that we expect from 2012 to 2014. In order to continue growing this business, we need to maintain our position to capitalize on strong customer relationships, maintain our exceptional level of high-quality, safe construction work and retain and attract skilled employees. As Carl mentioned earlier, the skill set and experience of the management team, both in the field and in the office, is a key competitive advantage. They understand how to manage organic growth by investing in the right people and equipment and growth through acquisition.

Finally, we continue to believe strong demand will continue for the foreseeable future in both the Transmission and Distribution businesses. Natural gas pipelines will continue to face additional federal and state regulations and require repair and replacement, while the number of new construction projects will remain driven by the growing development of natural gas and oil infrastructure in the shale formations around the U.S.

Flipping to Slide 18, in our Energy Services Group. We are projecting the guidance midpoint to be a loss of $3 million despite growth in earnings from operations. We've included a lot of information on this slide, so let me just hit a few of the high points. We expect 2014 to be a transition year for a few reasons. When 179D tax credits expired in 2013. Customer demand is improving, yet still not fully recovered. Our sales force expansion is complete, and we have made some organizational realignments, allowing us to better manage overall staffing levels and the resulting cost as we have adjusted the current market conditions. And we are particularly excited about the prospects of 2 market segments, the federal government and sustainable infrastructure. Think about distributed generation and combined heat power or CHP.

In summary, we still believe this business can become a strong earnings contributor over the medium-term, and we believe that is a nice compliment to Infrastructure Services as the focus of our long-term Nonutility growth story.

Onto our Coal Mining outlook in Slide 19, where we show a recorded loss of $16 million in 2013, including a fourth quarter loss of $4 million. We expect a much improved 2014.

Overall, in 2013, our Coal Mining group performed much better in the second half of the year. The mining plan changes at Prosperity are working well. And if not for some production delays in October and a few December delivery issues related to rail and weather, our fourth quarter results would have been stronger. We are projecting the 2014 midpoint guidance to be a loss of $4.5 million. We expect production to be 7.3 million tons, with sales of 7.6 million tons, including the carryover of 300,000 tons from 2013. Currently, we have 6.8 million tons sold for 2014, or approximately 90% of expected sales at an average price per ton of $44.50. Sales to Vectren's electric Utility are currently expected to be approximately 2.1 million tons. We are projecting the 2014 average cost per ton to be $43.50 compared to $46.12 in 2013. The approximate $2.50 per ton decrease is driven by the increase in percentage of production from the 2 Oaktown mines and improved Prosperity performance. Oaktown 2 production continues to ramp up as deep cuts have been approved, and the productivity improvement measures we implemented in 2013 at Prosperity are working well. Also, there has been no recurrence to-date of increased elevated citations at Prosperity as we experienced in 2013 October. But we will continue to closely monitor this situation.

Lastly, we are pleased to have 5.5 million tons already sold for 2015, which equates to over 70% of our maximum production level of approximately 7.5 million tons, and sold at a price of approximately $45.50.

Before we close out our Coal Mining discussion, let's turn to Slide 20 to consider the outlook for 2014 and beyond for Illinois Basin coal. We laid out several drivers that lead us to believe the Illinois basin is very well positioned to be a leading supplier of coal in both the near and long term. Overall, we believe the Illinois Basin will continue to displace coal from other regions, particularly, Central Appalachia. As demonstrated by the charts at the bottom of the slide, our Coal Mining group has been taking advantage of this changing market dynamic, both in terms of selling additional coal and diversifying the customer base in recent years.

A few final points from Slide 21, and then we will begin with your questions. We believe our company's future is bright. We operate premier Utility businesses in constructive jurisdictions. We use the word stability, but you could you replace it with consistent just as easily. As in consistent earnings growth, driving a growing dividend. For these reasons, we look forward to 2014 for Vectren and to the future years to come.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Matt Tucker from KeyBanc Capital.

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

Could you -- I guess, most of my questions are on Nonutility side and I'll start with Coal Mining since that's where you left off. Could you talk about how the recent cold weather and high natural gas prices are impacting your Coal Mining business? Or how they could impact it on a forward-looking basis?

Carl L. Chapman

Sure. What we've shared in the past is that anytime you get natural gas prices at the well head, $3 or $3.50, somewhere in that range, that our coal is going to compete very well, and that's obviously, adding transportation cost and everything else. So the higher gas cost here, although we still believe that for the long term, gas cost will stay reasonable, but I think that we also believe that our coal will compete well, going forward. So that would really be the answer. Now in terms of the shorter term, in '14, we shared, we have 90% of our coal already sold, and a little over 70% sold for 2015. So in the short term, I don't know if it has a huge impact on demand simply because of what we've already sold. But in the longer term, we had indicated before, we never believed that gas cost could stay down at the really low levels of 2012. But as I said, we still do believe though that gas cost will stay reasonable but within a range that our coal well compete against.

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

And then at Prosperity, you mentioned you made significant progress there. Are the improvements you've made yielding the results you expected so far? And how much more do you think you can do or over what timeframe do you hope to implement all the changes that you're hoping to?

Carl L. Chapman

Well, and I think, first of all, that the changes we'll make will be sort of be a continuous process, rather than so much that we make this change and now we're done sort of a thing. It's going to be a continuous focus on the cost there. So we are pleased with the changes that we have made, but we want to make more improvement in the cost at Prosperity, and we think that we can do that. But again, it's not going to be so much that, well, we made these changes, now we're done. We'll constantly look at that. Obviously, mining conditions change all the time in an underground mine, but we are pleased where we are. And then I would say, just a big picture, when you think of our total cost, not only do you have the improvements at Prosperity, but you have a higher percentage coming from Oaktown, which are obviously lower-cost mines.

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

Shifting to Infrastructure Services. You pointed out that you need a little more than $250 million in new work to meet the midpoint of your revenue guidance. Last year, you did a little over $500 million more than your backlog entering the year. So I guess, 2 questions. What type of work was that, that you saw come in last year, during the year? And I guess, what are you seeing in entering '14 that's causing you to take a more cautious view on that, kind of walk in or look and burn work?

Carl L. Chapman

Well, in terms of the backlog itself, I think it's fair to say last year that it was a very broad base before the work came in. We had nice strong work from Utilities, so that was on the Distribution side. And on the Transmission side, repair, primarily pipeline integrity work. And then also the shale work, it was really across all the areas. In terms of how we look at the backlog, what we tried to share, and Jerry covered it was, what we've actually seen this year is, I think on the Transmission side, some of the larger customers are going ahead and giving us a better sense of what our work might be. So that's why we still think that the numbers are going to be more similar to last year in terms of earnings and revenue, even though the backlog is higher because we just are seeing a focused commitment earlier. Obviously, that also means though that we feel very good about our ability to fill in a smaller gap, but Jerry also tried to share that big impact during the first quarter from weather.

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

And just a follow-up to that, the midpoint of guidance suggests gross margins to be down roughly 100 basis points in '14. How much of that is related to the first quarter weather issues that you mentioned? And are you seeing any changes in pricing or competition that would contribute to that?

Carl L. Chapman

I really believe that the best way to think of that is, is purely mix in the kind of work that we're doing. And so, I don't think that we're seeing some huge pressure on margin at this point. Obviously, we always want to make sure we have a competitive price, but I think it's a lot more just about mix than anything else.

Operator

Your next question comes from Gabe Moreen of Bank of America.

Brian Brazinski - BofA Merrill Lynch, Research Division

This is actually Brian Brazinski on Gabe's team. I want to go back to Coal Mining. I mean, you guys have given a lot of detail onto your assumptions for the segment going forward. But in relation to average cost per ton, just want to get a little bit more color on that and dig deeper. Obviously, if you could provide cost per ton by mine, that would be a deal. But if not, can you speak to, how much of the decrease year-over-year do you expect to be due to the ramp up of Oaktown 2? How much do you think would be due to ongoing cost reduction at Prosperity? And then any other factors that you think will affect the metric?

Carl L. Chapman

Sure. Yes, we understand the desire for the separate cost. We just don't think that's a good answer for us for competitive reasons and those kinds of issues. But in terms of the split, we don't really have an estimate for you on the split between those things. I would just say, for one thing, of course, you can get a good handle on part of how it's driven, simply because of the extra tons, which obviously are all going to come from Oaktown. So I think you can get some better sense there, but we really do not have a split to give you on that, between what's driven by Prosperity improvements in Oaktown 2 ramping up.

Brian Brazinski - BofA Merrill Lynch, Research Division

Okay. Do you guys have a forecast in terms of when you believe the Coal Mining segment will able to break even or be profitable?

Carl L. Chapman

We don't really have a date to give you on that. Obviously, what we're focused on is making sure we sell the coal, which we've made good progress on by being at 90%, and then just continue to focus on the cost to sales. Obviously, huge improvement here this year with going from a $16 million loss to our midpoint for '14 at $4.5 million, and we'll just continue to focus on the issues we've discussed.

Brian Brazinski - BofA Merrill Lynch, Research Division

Okay. Great. And the last question for me is about the Utility Group and the 2014 EPS forecast that you put out. How much of that is attributable to accelerate a recovery under the Indiana Senate Bills 560 and 251 that you've filed for in November?

Jerome A. Benkert

That's a good question. Actually, we expect those bills to come in to play so that the order, as we said, second half of the year. So that will be later in the year, but there's some additional margin pick up there. So I'd say we're being helped by the Ohio that's coming earlier. As well as the lower operating cost that we spoke about.

Operator

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

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Just a clarification question first. Jerry, did I hear you correctly that 10% is a good go-forward annual growth rate for Infrastructure Services?

Jerome A. Benkert

Great. Well, yes, Sarah. You heard me say that and we've said before that base has stepped up so large and the people have asked me, what's the trend line from there? And so we try to set that out, but ultimately, we're still guessing a little bit here.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Okay. And then shifting to coal, in terms of the price per ton, does that $43.50 pretty well incorporate the productivity pickup from Oaktown 2? Or should we still expect a tailwind on the cost side beyond '14?

Carl L. Chapman

Yes, Sarah. I think we would expect Oaktown 2 to continue to improve. Obviously, we would only be really in our second year here. We do have most of the approvals that we have for the cuts and those kinds of things, but we still are in a bit of ramp-up mode. On the other hand, in terms of volume, we expect to be, as you can see, from our numbers very close to maximum production but we would expect to continue to improve our cost there.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

So for comparison purposes with Oaktown 1, which is on a little bit earlier of a ramp, are you still seeing cost improvements with that mine?

Carl L. Chapman

Yes, we're still seeing improvements with Oaktown 1. And again, it depends on where you are in the mine at various times. So it's never a sort of a flat situation where you can exactly predict at a point in time where the improvements will come because it really will depend on geology. But in terms of productivity itself, we do continue to see improvements at Oaktown.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Great. And then one on coal pricing. It looks like the expectations for price per ton are down slightly from the last update. Can you talk about some of the underlying drivers there and any reason to expect pricing to firm up over the next 6 to 9 months?

Carl L. Chapman

I think the real answer as always comes back to just demand, and so we were talking earlier about the gas cost side and a lot of that's heavily impacted there. And so we really have 2 things going on that could help demand quite a bit. One is the gas cost, and 2, of course, is just what the winter has been. So the real driver here will simply be at what pace the primarily, the utilities and the thermal part of the coal business decide to start buying coal and how much. And, of course, then, what does gas do? So those are the 2 big impacts.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

As a follow-up to that, how do coal stock piles look at, at Vectren's coal plants, and then more generally, in the Illinois Basin in the Southeast market?

Carl L. Chapman

Well at Vectren itself, our coal piles are in very good shape. In fact, probably arguably on the low side, a little bit. In terms of the Illinois Basin, coal piles are still a bit higher, although I don't have any recent data post some of this winter weather. And there's no question the piles are coming down. And it probably is very specific based upon the utilities. But I think across the country, piles are way down. In the Illinois Basin areas, coming down probably not quite there yet, but this winter should really help.

Operator

Your next question comes from the line of Michael Gaugler -- sorry, Paul Patterson.

Paul Patterson - Glenrock Associates LLC

The -- well, I want to touch basically on with respect to the cost per ton. Looking at 2015 and assuming that Prosperity is working out as you guys expect it to, should we think that, that cost per ton might go down even further?

Carl L. Chapman

Well, at this point, we're not sharing any cost for 2015 on the cost per ton. As we mentioned before, we're continuing to work on improving Prosperity's cost, and we would hope we could see some improvement there. We would hope that we continue to see improvement at Oaktown 2. We have no numbers to share at this point for '15.

Paul Patterson - Glenrock Associates LLC

Okay. Not even directionally or?

Carl L. Chapman

Well, again, I just described to you, we would hope to see improvement at both Prosperity and Oaktown 2, but we don't have anything in terms of magnitude to share with you.

Paul Patterson - Glenrock Associates LLC

Okay. I appreciate that. And then just on Energy Services. It appeared -- if you could just describe a little bit more terms of this thing, the transition your -- you explained that pretty well. But you also explained that you saw a considerable opportunity pass this year. I was wondering if you could just sort of maybe give a flavor as to sort of -- I mean, I know you guys aren't giving 2015 numbers, So I don't mean to push you on it. But I'm just trying to get a better feel as to what you guys think might be -- might ultimately come out of that?

Carl L. Chapman

Yes, we don't have numbers to share, but in terms of direction, and I think Jerry covered this a bit. We see this business now in really 3 big areas: one is the traditional with the MUSH business, that's the historical business that's municipals, universities, schools and hospitals. And I think we are seeing some hopeful signs of those customers starting to move in the right direction. No great improvement yet, but we are seeing some good signs there. The second piece is the federal government, and I think with what President Obama has in mind with energy efficiency for the federal government, we'll see good things. And then finally, what we're calling Infrastructure, we really believe is also going to be good there. And if you think of distributed generation or CHP, combined heat and power, we think sustainable infrastructure will be a nice growing business. We've got expertise, and we think there's a lot of that to look at across the country.

Operator

Your next question comes from the line of Andy Levi from Avon capital.

Andrew Levi

I think actually most of my questions were asked but just 2 more on the coal side. Actually, just back actually to Paul's question. So just on the cost per ton in '15, I understand you're not giving guidance, but this $43.50 you have for this year, what would make that number go up next year? I would assume, I mean, it will probably goes down but or stays the same, but?

Carl L. Chapman

Well, again, that's just the directional question. We've got no numbers to share, but directionally, the 2 big things that we have as we continue to work on improvements at Prosperity. Again, it's always going to be tied to geology. Secondly, it's going to be Oaktown 2 where we are -- it really just a few months, if you will, into life of that mine. And then we continue to always look at where Oaktown 1 is. So directionally, we would continue to hope to move the numbers but we just don't have anything in terms of magnitude to share today.

Andrew Levi

Okay. And I would assume that you expect that mine, your mine safety violations, should be contained and not result in any closures? Is that correct?

Carl L. Chapman

Well, obviously, we start with, #1, safety at the mines. I mean, obviously, cost is important. But #1 is safety, and so we're focused on the citations. We had what we shared last year with some unusual elevated citations that occurred at Prosperity, that's not recurred, and we have no reason to believe that it would. But we are focused on how we can have safe mines. That is our driver.

Andrew Levi

Okay. So that shouldn't be a concern of any potential closures or anything like that, right?

Carl L. Chapman

Well, what we shared, and you can get into some of our language in one of the slides, but also on the 10-K, that if we were, for some reason, to be put on a pattern of violation and we have no reason to expect that at the moment, but if we were, that would have an impact on the mine. But we are running our mines today and they're performing generally as we would expect them to be.

Jerome A. Benkert

And that discussion was relative to the Prosperity mines total.

Andrew Levi

Got it. And then, again, I'm just checking my notes from the past, your total capacity, because I heard you said that you're kind of at full -- that 7.5 million tons to about 8 million tons a year, right? Is that correct? All your...

Carl L. Chapman

Yes, I think we disclosed -- we have them on one of our slides that actually, as we talk about being a little over 70% sold, we said maximum production of 7.5 million.

Andrew Levi

And we'd see -- the improving coal outlook for you guys, now having both Oaktown 1 and Oaktown 2, and Oaktown 2 almost completely ramped up. Any thoughts of possibly monetizing that coal business?

Carl L. Chapman

Well, we have shared for quite some time that we wanted to have a lesser focus or reliance on commodity-sensitive businesses but we're just very disciplined in our approach to all of our nonrigs, whether it's commodity or otherwise. And that is that we look at, #1, do we think that we can earn our desired returns? And if we're talking about nonrig that's in the 12% to 15% IRR. And then secondly, if we can earn that, then the issue is, can we get that value to our shareholders? And that's what we're still focused on. We're focused on improving Coal Mining and making those evaluations.

Andrew Levi

Is there a market for your assets, do you think?

Carl L. Chapman

Well, I don't think there's any reason for us to speculate on that. I would just simply say, we think we have good coal mines, and that's probably all that really is to say on that.

Operator

[Operator Instructions] Your next question comes from the line of Matt Tucker from KeyBanc Capital.

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

Just a few follow-up questions. On Energy Services, you mentioned, at least from the slides, improves cost structure. At the same time, you've pretty significantly brought down your gross margin guidance. Could you just kind of help us reconcile that commentary and elaborate a little more on what's driving the lower gross margins?

Carl L. Chapman

Sure. It really -- very simple. As we have seen a lot of opportunities in the sustainable infrastructure area, that, we believe, a bit lower margin. Federal may sometimes also be a bit lower margin. And so it is simply a mix of business. We do think we have a cost structure that makes sense once we get our sales force that we've hired up into full production, so we think our cost structure now we've made some changes is good, but the lower margin is simply product mix.

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

Got it. And then on Infrastructure Services, you mentioned, I guess looking at expanding your footprint there, could you elaborate a little bit on that comment?

Carl L. Chapman

Yes. I think in our footprint, we have continued to add, we obviously, on the Distribution side started out as a Midwestern company and we've now gone south, Mid-Atlantic, and to some extent, the Northeast. And so we just continue to look at opportunities there as to how we can -- to grow. And then on the Transmission side, we're really heavy in the central area and in the Bakken on the shale side. We'd like to see more opportunity. I think we have that in the Marcellus and Utica. And then as other shale areas open up, we want to look and see if those makes sense for us, too.

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

And in the past, you've not wanted to quantify the mix of Utility versus shale-type work, but can you give us a sense directionally how that mix has been changing? And which type of work do you see growing faster looking ahead at '14?

Carl L. Chapman

Well, I think looking ahead of '14, we think both areas have very strong potential and it really just comes down to where particular customers, what their needs are at any given point in time. And so, we don't really don't have anything else to share with the split. But I do believe that we're seeing opportunities in both parts of the business, or maybe it's really 3 parts of the business because it's repair and replacement Distribution, repair and replacement Transmission, and then, of course, new shale, Oil and Gas pipe, and waste water is also an opportunity there.

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

And just one on the Utility side. Holding on, on flat, or I guess, to bringing it down in '14 a little bit. Is the goal -- could you give us some more specifics on where you see the opportunity to do that?

Jerome A. Benkert

Yes, Matt. And that really plays off 2013 also. We've said before, and we have continued programs around strategic sourcing. We're continuing to sort of ramp those up, and we continue to spread performance management efforts in that area, and almost as a cultural issue throughout the company. So there's ongoing plans, there are multiple years in advance, we continue to work all of that for long-term permanent savings. But there's also a bit of an impact just on the earnings are strong, the Utility doing well this year, we took advantage of the opportunity an accelerate some additional work into this year, '13, which raised some also -- that also offers some potential for '14, '15.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Robert L. Goocher

Thank you, operator. Well, 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.

Operator

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

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