Vectren's (VVC) CEO Carl Chapman on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Vectren Corp (VVC)

Vectren Corporation (NYSE:VVC)

Q2 2014 Results Earnings Conference Call

August 5, 2014 2:00 PM ET


Robert Goocher - Vice President, Investor Relations and Treasurer

Carl Chapman - Chairman, President and CEO

Susan Hardwick - Senior Vice President and CFO

Ron Christian - Executive Vice President and Chief Legal and External Affairs Officer


Matt Tucker - KeyBanc Capital Markets

Gabe Moreen - Bank of America Merrill Lynch

Sarah Akers - Wells Fargo


Good afternoon. My name is Julie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Vectren Second Quarter 2014 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Robert Goocher. You may begin your conference.

Robert Goocher

Thank you, Operator. Good afternoon. And thank all of you for joining us on today's call to review Vectren's 2014 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 second quarter results and this morning we filed our 10-Q. You can find copies of the earnings release, today's slide presentation and the 10-Q on our website also under the Investors link.

As further described on slide three, I would like to remind you that many of the statements we make on this call are 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 remarks. He will then turn it over to Susan Hardwick, Senior Vice President and CFO, who will discuss in more detail our updated 2014 guidance, year-to-date results and highlights, and provide Utility and Nonutility updates. Also joining us on today's call are Ron Christian, Executive Vice President and Chief Legal and External Affairs Officer. Following our remarks, we will be glad to answer questions you may have.

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

Carl Chapman

Thanks, Robert. And I also like to welcome everyone to today's call. As always, we appreciate your interest in Vectren. Turning to slide four, I would like to begin today's call with the few comments on Vectren’s ongoing business mix, following the expected sale of our Coal Mining business and the purchase of Chevron’s Federal Energy Services business unit.

We are very pleased and excited about the future for Vectren with our current business structure, our core Utility, as well as Infrastructure Services and Energy Services. Our premier Utility business is the platform for consistent earnings growth for Vectren and we expected to continue to provide about 80% of our consolidated earnings going forward.

On the right of slide four, you can see our focus Nonutility portfolio, consisting of a Pipeline Construction business, Infrastructure Services and our Performance Contracting and Sustainable Infrastructure business Energy Services.

The primary contributor in Nonutility earnings will continue to be Infrastructure Services as the national emphasis on pipeline integrity and shale gas production should drive demand for pipeline construction and replacement for the foreseeable future.

We believe we have a premier pipeline construction business with expertise and transmission, distribution and wastewater construction, and outstanding customer service reputation evidence by many very long-term customer relationships and projected revenue of $800 million in 2014.

For the other component of our Nonutility portfolio Energy Services, we continue to believe this business is poised for very nice earnings growth in 2015 and beyond. With our April acquisition of the Federal business unit of Chevron Energy Solutions, we were able investment in the segment where we expect to see significant new growth, as the federal government is ramping up efforts to improve efficiency at its facilities and operation centers across the country.

The improving outlook for Federal work was boosted in May with President Obama's announced goal of $2 billion in energy efficiency upgrade to federal buildings in the next three years, which doubled the initial $2 billion goal announced a few years ago.

We believe we have an outstanding Energy Services business that will take off in the next few years with strong capabilities in traditional performance contracting and sustainable infrastructure like distributed generation and renewables. The focus on efficiency and higher power prices across the country will drive this opportunity.

Strategically, as you know, Vectren has been seeking more consistent in our consolidated earnings in recent years and we have been successful in doing so. Given the legislative and regulatory support for current recovery of much of the investments that need to be made in our Utility businesses, we believe we are well-positioned to continue to deliver solid predictable growth in our core Utility businesses that provide the lion share of Vectren earnings.

In addition, in recent years we've narrowed and reposition our Nonutility portfolio to reduce our reliance on various commodity businesses for future earnings growth due to their earnings volatility.

At the same time, we have focused our efforts on growing our Infrastructure and Energy Services business, which we believe provide an earnings stream our shareholders will value in our stock.

We sold our Retail Natural Gas Marketing business in 2011, exited our Wholesale Gas Marketing business in 2013 and in July announced the sale of our Coal Mining business with the closing expected later in the third quarter.

In addition to organic growth, we acquired Minnesota Limited in 2011 in our Infrastructure Services business and the Federal sector of Chevron Energy Solutions in April of this in our Energy Services business. These series of transactions and investments demonstrates strong execution of our stated strategies.

We believe this mix clearly improves quality of earnings and that this mix better alliance with our shareholder base and including our core Utility business we feel very good about the long-term growth prospects for all three of these businesses over the next decade.

Before I turn it over to Susan to go through more of details of our second quarter and year-to-date results, let me step back and review at a high level performance over recent years.

As I hear some historical context with respect to our strategies and the success we have had executing our business plans, note that the next few slide we use the updated 2014 guidance mid-point that Susan will discuss further in just a few minutes.

On slide five, the top graph demonstrates our commitment to achieving consistent earnings growth anchored with about 80% of Vectren’s consolidated earnings coming from our premier Utility businesses.

Based on our revised midpoint 2014 Utility guidance of a $1.80 we have achieved 4.1% in compounded earnings growth since 2010. This consistent earnings growth is result of largely from our Utility group earnings its overall authorized ROE levels of just over 10%.

At the bottom of that page, you'll notice we have previously announced that we expect to make significant future investments in our Gas Distribution business. We expect to recover much of that investment timely with various rate adjustment mechanisms that are provided by legislation and supportive regulatory environments in both Indiana and Ohio.

Based on our file spending plan that Susan will discuss in a few minutes, we expect to realize compounded rate base growth through 2018 of nearly 4% thus providing a foundation for solid and predictable Utility earnings growth.

Moving on to slide six, you can see Vectren’s consolidated earnings have consistently grown annually at a compound growth rate of nearly 9% over 2010 to 2014 period, based on the midpoint of our guidance of $2.30.

While we recognize that 9% growth is not sustainable long-term and we're not updating our earnings growth rates today, we are confident these businesses are poised for long-term growth. We will be reviewing all of our growth expectations over the next few months, the determine of any update should be made given our favorable outlook for the future.

At the bottom of the slide is the recent growth in the annual dividend level, which equates to about 1.5 % per year, compared to the nearly 9% growth in earnings. Strong earnings growth has allowed Vectren to dramatically reduce our payout ratio from 83% in 2010 to roughly 63% expected for 2014, which is lower than our targeted dividend payout ratio of 65%.

The payout ratio is under our targeted ratio in 2014 and with an improving outlook for consolidated earnings growth Vectren is now well-positioned to not only continue our 54-year streak of annual dividend increases but also we consider higher goals for dividend growth rates and resulting total shareholder return.

The opportunity for higher dividend growth is also part of the analysis that we will be doing over the next several months in anticipation of providing guidance for 2015 at the appropriate time.

So, again, we are very pleased with the quality of our business mix going forward and combined with our recent history, we have great confidence that we are very well-positioned to deliver consistent earnings and dividend growth to our shareholders.

With that as background and context, I’ll turn it over to Susan to provide more insights in the 2014 guidance and the quarter and year-to-date results. Susan?

Susan Hardwick

Thanks, Carl. Let’s start with the look at our update guidance for 2014. Slide seven show that the consolidated level excluding all Coal Mining results we are narrowing our guidance to a range of $2.25 to $2.35 per share up from $2.15 to $2.35 per share based on current and expected strong Utility results. We are raising our Utility EPS guidance range by $0.05 per share to a range of a $1.75 to a $1.85 from our previous range of a $1.70 to a $1.80 per share.

For the Nonutility group, Infrastructure Services will continue to be the major contributor to result as Carl has said. While the business did experienced a slow start to the year, recent performance indicates we should meet our initial expectation of matching 2013’s record, 2013’s record earnings level assuming that we have normal weather for the rest of 2014.

For Energy Services we are lowering our 2014 expectation because of the pace of signing new contract in ‘14 has been slower than we originally thought. This of course has the effect of pushing that earnings opportunity into 2015 where we see this business returning to profitability and then growing from there.

And finally, with the expected sale of Coal Mining business, we exclude all results for Coal Mining from the 2014 EPS guidance. From an overall Nonutility perspective, we continued to expect 2014 Nonutility EPS to be $0.45 to $0.55 per share.

As we begin our review of second quarter and year-to-date results and expectations for the remainder of 2014, my comments exclude Coal Mining results in 2014 and ProLiance results in 2013, the year of dispositions for each one of those entities.

We believe excluding results in the year of disposition provides the most useful comparison of the results of ongoing operations and you'll find the reconciliation of GAAP to non-GAAP measures of earning in the appendix on slide 20 and 21.

With that, let’s move on to slide eight and nine, net income for the six months ended June 30, 2014 was $82.4 million or $1 per share compared to $81.5 million or $0.99 per share for the six months ended June 30, 2013.

Year-to-date Utility results were up approximately $5 million compared to the prior year and compare favorably to our 2014 plan. While year-to-date Nonutility group earnings were down about $3.5 million versus the prior year, Infrastructure Services net income improved $1.5 million in the quarter, up nearly 20% versus the prior year as construction weather finally improved and crews were able to begin catching up on work that was delayed due to those first to those four -- first quarter weather conductions.

In total in spite of the slow first half from both Infrastructure and Energy Services demand and backlog in both businesses remains very strong. We expect to meet our initial earnings expectation for the Nonutility group in total for the year. This is a normal weather and related construction conditions particularly in the fourth quarter which is key to Infrastructure Services performance.

Let’s turn to slide #10 and begin with our Utility review and outlook. You will see year-to-date Utility earnings were $84.2 million or $1.02 per share, compared to $79.3 million or $0.96 per share in 2013. Due to some additional operating expenses, second quarter Utility earnings were down slightly compared to the prior year.

Year-to-date results were driven by increased gas margins associated with increase small customer growth and large customer using increases as well as returns from Ohio Gas Infrastructure replacement programs.

The weather impact primarily the Electric business has been offset by an increase in weather-related operating expanses at the Gas business. And finally, favorable tax impacts in planning and income tax rate reduction contributed to the increase.

So for the remainder of 2014 we expect Utility operations to remain strong and support our decision to increase the Utility EPS guidance to a range of a $1.75 to a $1.85 per share.

Turning to slide 11, regulatory matters related to the recovery of infrastructure investments are either resolved or progressing very nicely. A May hearing was held in Indiana on Vectren’s filing to recover capital investments to be made by our natural gas utilities under Senate Bills 560 and 251.

The testimony filed by the other parties in the proceeding is generally supportive of our investment plan and a related-recovery mechanism. We anticipated an order from Indiana commission late in the third quarter that’s generally consistent with our filing and we would then start earnings recognition shortly thereafter.

As we told you in May, the Ohio Commission has approved our $187 million, five-year extension of the existing Distribution Replacement Rider or DRR mechanism which provides for the recovery of cost related to the acceleration of our bare steel/cast iron replacement programs and additional natural gas infrastructure improvement. Also the Ohio commission approved deferred cash recovery for 2013 capital expenditures, not otherwise tracked of approximately $27 million under Ohio House Bill 95 and we would expect similar filings to be made annually.

Regarding our electric operations in March, we filed with Indiana Commission under Senate Bill 251 and 29 seeking approval for $70 million to $90 million of additional pollution control equipment and modification necessary to meet EPA compliance. Hearings took place last week and we would expect to receive an order in the fourth quarter of 2014.

Before I move onto Nonutility group details, let me spend a couple of minutes on the impact of the EPA’s Clean Power Plan issued in June on our operation. As noted on slide number 12, Vectren is fully engaged in analyzing the EPA’s carbon rule.

Our focus is on protecting our customers from impacts to their bills and meeting their requirements to reduce carbon emissions in the most cost effective manner possible. Along with the other electric utilities in Indiana and working with the State of Indiana, which will actually develop the implementation plan as well as their active participation in both the Edison Electric Institute and the American Gas Association, we are thoroughly analyzing and assessing the impact those rules could have on both our electric and gas businesses.

As I’m sure, you’ve read and heard many times already with respect to these rules, there is much that is not yet known about how the rules will work. Our governor here in Indiana made the decision this past week to challenge the rules in court. In doing so, he expressed his concern about the impact of the rules on Indiana Utility customers.

Like the governor, we too share that concern and we intent to undertake every reasonable effort to mitigate the effect these rules have on both our residential and business customers. Ultimately, to the extent, costs are imposed upon our electric utility to comply with whatever final rules there maybe. We have in Indiana the statutory framework that enables us to recover those costs.

Referring back to a few keypoints on slide #12. Indiana has a carbon intensity reduction goal of 20% and must submit a statewide reduction plan in 2015 for approval in ‘16. Though we expect litigation to delay the timing of implementing those rules, Vectren is evaluating the reduction goal in our current emission status.

Our actions over the last several years have helped to reduce Vectren’s CO2 emission rate and significantly reduce our tons of CO2 emitted, which are down 23% on a tonnage basis since 2005. Vectren’s current carbon intensity is nearly identical to that of the State of Indiana’s other electric utilities and our overall carbon contribution represents less than 6% of total annual Indiana emissions.

While the impact on Vectren will be depended on final rules in Indiana’s plan to implement. Again we expect that any investments that we were required to make to comply with carbon rules would be timely recovered under Senate Bill 251 or Senate Bill 29.

Now let’s take a look at our Nonutility group and move to slide 13. An infrastructure services second quarter earnings were $9.4 million compared to earnings of $7.9 million in 2013. Second quarter net income and earnings from operation compared to the prior year were both up approximately 20% as infrastructure services was able to catch up on the portion of the work plan for the first quarter.

As we mentioned in last quarter’s call, the harsh winter conditions and related road restriction continued into the second quarter, somewhat limiting us from even better second quarter results. As Carl mentioned earlier, construction work has come on strong since May. Demand continues to be strong enough to overcome the slow start to the year. And we fully expect infrastructure services to achieve the initial earnings expectation we set in February so long as normal weather conditions continue for the rest of the year.

Employment at the beginning of August was approximately 3300 workers and is already near our record peak employment set in 2013. And in addition, the estimated backlog at June 30 was a record at approximately $635 million compared to $585 million as of March 31st and $445 million at the end of the second quarter 2013.

We continue to sign additional contracts as demand for maintenance and replacement work remains strong from utilities. In addition, there continues to be high level of demand for natural gas and oil transmission pipeline integrity work as well as new shale-related pipeline construction work. Overall we see a very long cycle for pipeline construction and replacement work.

Moving onto energy services on slide 14 on our recent acquisition, the integration of employees has gone very well with nearly all 70 professionals retained during the transition period. The first project related to the acquisition was secured in June at VA facility in Palo Alto, California, where efficiency work is being done to upgrade lighting and the chiller unit. Although energy services is still early in the integration process, we are very pleased with the progress today.

Energy services year-to-date loss of $4.8 million and the now higher projected loss of $6 million for the year are primarily due to delays in contract signings in the first half of 2014. Two projects, one previously announced and one anticipated later this year have been slower to bring the signing than we had expected. However, partially as a result of the delayed signings on these projects which represents about two-thirds of the decline in energy services project at 2014 results.

We have also raised the expected year-end backlog from $125 million to $160 million. And we do expect our loss at the EBITDA level to be cut by more than half in 2014 versus ‘13, which is an improvement of over $4 million.

As we told you when we announced the acquisition, we expect energy services to return to profitability in 2015. The delays in activity in the first half of 2014 should push more contract signings into the latter half of the year, which in turn will push some earnings recognition into 2015.

Energy services sales funnel is the largest in its history, both in the public and federal sectors. This list of potential work continues to grow and includes projects from the recent federal sector acquisition whose funnel is also the largest in history and where the outlook remains strong going forward.

On slide 15 is a brief update on the sale of our coal mining business. As previously mentioned on July 1st, Vectren signed a stock purchase agreement to sell its coal mining business, Vectren Fuels, to a subsidiary of Hallador Energy Company. This transaction resulted in a second quarter after-tax loss of about $20 million or $0.24 per share, including estimated closing and sale-related costs. And the transaction is expected to produce about $280 million of net cash proceeds.

The closing is on track and expected to occur in the third quarter of 2014. Excluding the loss on the transaction, 2014 operating results will be about breakeven. We intend to use the proceeds to immediately retire $200 million in outstanding Nonutility variable rate term loans and to pay down Nonutility short-term debt. Overall, we expect the current annualized interest savings to be approximately $4 million.

We have planned this use of proceeds because one of our primary financial objectives is to maintain a debt portfolio with varying maturities and a consolidated variable rate debt-to-total debt ratio of 15% to 20% for maximum financing flexibility. Opportunities to refinance higher rate Nonutility debt will come in the very near term.

We can achieve further interest savings without incurring make-whole penalties by waiting for normal maturities which come in late 2015 and early 2016. This use of proceeds has been contemplated in our earnings guidance and growth expectations.

In summary, Carl covered the successful execution of our business plans over the last few years in our compelling business mix. We believe Vectren is positioned exceptionally well to deliver long-term shareholder value.

However, since the announcement of the sale of our coal mining business on July 1st, our stock has significantly underperformed our peer group. Research from the financial community and our discussions with investors show strong support for the execution of our business plans, including the decision to sell the coal mining business.

With the comparative under performance of our stock in July, we now find Vectren with a current dividend yield of approximately 3.8% which is above the peer median. We believe that our future ability to provide consistent earnings growth, a growing dividend and a strong total return to shareholders should be rewarded with a premium valuation.

That concludes our prepared remarks. And with that operator, we are now ready for questions.

Question-and-Answer Session


(Operator Instructions) And your first question comes from the line of Matt Tucker. Your line is now open.

Matt Tucker - KeyBanc Capital Markets

Hi. Good afternoon.

Carl Chapman

Hey Matt.

Matt Tucker - KeyBanc Capital Markets

First question on infrastructure services, I was pretty impressed by the gross margin expansion you saw despite revenues not been up that much and you mentioned you still saw some adverse weather impacts early in the quarter. So can you just talk a little bit about what was driving that improvement in margins?

Carl Chapman

Yeah. I think it really is a mix issue, Matt. You identified already that revenue growth was not as large. And that of course is two things that we do have the mix of the projects would be one and then on the revenue, we also would have had some revenue still from the 80 mile pipeline project last year in the second quarter, even though a lot of it was done in the first quarter.

Matt Tucker - KeyBanc Capital Markets

Thanks. And I guess, would it be fair to assume that the margins in your current backlog are also stronger than the same point last year, I know you have pretty strong margins in the second half. So, I guess, if you could just comment on that, please?

Carl Chapman

Well, I think, again, it’s always going to be about mix, as you know and also lot of work is done under blankets and so even though we have some sense of the work to be done, it also can still change based upon what the customers need are.

So if you look at slide 17, we have suggested that the midpoint for our gross margin as percentage of gross revenue would be 17% for the year and you can see, obviously, that we're at 18% for the three months and 16% for the three months last year.

Matt Tucker - KeyBanc Capital Markets

Thanks. And then I also notice, you previously were breaking down the backlog by blanket contracts and fixed price, and it looks like now you are including or you are lumping together fixed price and unit price contracts? Is that because, I guess, our unit price contracts kind of the new thing for the business and I guess, Part B, would you be willing to breakout for us just a pure fixed price portion?

Carl Chapman

Yeah. What we really -- as you know what we are trying to say is blanketed bid and so the bid contracts are really just as described, which is it’s a specific service over specific price.

So we really try to move. I think what you are asking for to a great extent in that we have blanket and then bid and the bid of course, would have the specific price, as well as the specific service.

Matt Tucker - KeyBanc Capital Markets

Okay. And now just one on Energy Services, can you provide anymore detail on the expected timing of the two large awards? And then, your revenue guidance don’t implies pretty strong second half revenues relative to the first half. So, if you talk a little bit about maybe the trajectory or weighing of that implied growth over the third and fourth quarters?

Carl Chapman

Sure. I think, Susan, shared in her comments that one of those contracts is now been received and the other one we expect later in the year. It’s likely to be fairly late in the year, but one I am already received and then just the rest of it is we have already commented the backlog is up like it is and then the funnels are just very strong.

Matt Tucker - KeyBanc Capital Markets

So, I guess, the first contract with that contribute both to the third and fourth quarter, and then the second one, we should assume just, I guess, little bit of impact on the fourth quarter?

Carl Chapman

Yeah. It’s obviously the customer’s decision, but no question given that the one is done, we would expect to see revenue in both quarters on the one and on the second one as you say, it’s much more likely to be fourth quarter.

Matt Tucker - KeyBanc Capital Markets

Okay. Thanks a lot. I’ll jump back in the queue.

Carl Chapman

Thank you.


(Operator Instructions) Your next question comes from the line of Gabe Moreen. Your line is now open.

Gabe Moreen - Bank of America Merrill Lynch

Hey. Good afternoon, everyone.

Carl Chapman

Good afternoon.

Gabe Moreen - Bank of America Merrill Lynch

On the infrastructure services side of things and the composition of the backlog, could you talk about Utility work versus shale work, and whether the increase in the backlog is skewed in any direction?

Carl Chapman

Hey, Gabe, I think it’s pretty broad. We would really describe it, though, as probably three areas because when we say the Utility work, that would be on -- repair would be a lot of it, of course. But also in the pipeline area, both oil and gas, a lot of that is driven by repair or what we call integrity work and then there is shale work. I don’t think there is any question shale is picking up as we continue to see more going on in the various shale plays. But we’re as we’ve said many times, heavily driven by the more pipeline integrity and then the Utility distribution work.

Gabe Moreen - Bank of America Merrill Lynch

Got it. And there’s a follow-up to that Carl, if you can maybe talk about whether you’ve had any success getting into some new shale regions and also whether you’ve seen a change in customer behavior or work, given I think some on the new flaring regulations that might be coming out in North Dakota?

Carl Chapman

Sure. I think that at this point we still are heavily focused in the Bakken and then also the Marcellus and Utica. With the Utica picking up more, we sort of look at those together but probably seeing more activity in the Utica, but that still where we are focused. And then I think in terms of flaring, there is some activity, it just awfully early to see exactly how the various producers are going to respond to that. But I don’t think there is any question, you’re seeing a lot of discussion and the producers heavily focused on how to solve that. And of course, we do believe much of it will be solved by pipe. We realized some will be by rail, but even on rail we’ve shared before than we’re often building the facilities to get it to the rail location.

Gabe Moreen - Bank of America Merrill Lynch

Great. Got it. Thanks, Carl. And then last one from me, appreciating that you’re going to be coming out with longer-term growth rates and payout ratios, sometime in the next couple of months. But can you maybe just at least talk qualitatively to what you’re thinking for structure services in terms of, I guess, the ability to support the dividend out of that the business, given its growth trajectories as well as the greater predictability of that business, relative to some of the other former non-regulated businesses?

Carl Chapman

Sure. Gabe, no question that part of the reason that we’ve gone down the path we have on reducing the commodity exposure is because of the more consistent earnings from the non-regulated businesses. We’ve also shared, however, they are Construction businesses. But the difference is that we think, we’re in very long cycles here, particularly in infrastructure services.

In terms of the dividend, no question, the primary driver is still the Utility, but we do believe that we can count on growth that the other two businesses to assist on the dividend, but we clearly see the dividend has been driven from the Utility.

Gabe Moreen - Bank of America Merrill Lynch

Great. Got it. Thanks.

Carl Chapman

Thank you.


And your next question comes from the line of Sarah Akers. Your line is now open.

Sarah Akers - Wells Fargo

Thanks. Sorry if I miss this but can you walk through which items are trending better than expected this year at Utility?

Carl Chapman

Sure. And Sarah, actually, probably the easiest place to see that is our reconciliation in the press release. But I think that we are seeing year-over-year on year-to-date customer growth on the gas side, the Ohio infrastructure replacement programs. The negative on the gas side was that there were a lot of maintenance items that came up because of the extreme cold.

And then if we flip over in the press release, we talk about the weather impact, which we haze described as $2.2 million, so not huge year-to-date, year-over-year. We do have some other customer increases and they’re small. We’ve seen some pick-up in wholesale margins, primarily due to the higher prices, some of which may have been driven by weather and it’s hard to tell but some pickup in wholesale margins and some interest savings also on the electric side.

Sarah Akers - Wells Fargo

Got it. And then one on energy services, can you give us sense of what’s causing customers to delay, entering the contracts and then separately how budgets are looking for your customers?

Carl Chapman

Yeah. I think that this is not the answer that’s easy for you to hear. I know, it really just is very dependent on that particular project. So I don’t really think at this point, like as an example the two projects are more about just agreeing on design and the final approach that we’ll use with the customer. So those are really different. I think by the fact that the funnel looks better than it has looked in a long time.

We’re seeing some of that delay that we had seen with schools and others. We’re starting to see some improvement there. But we do continue to see that it just takes longer for approval. So I think there is some general aspect. Those two projects are unique. But I will tell you that like we see because of the funnel we really do think, we’re starting to see much more interest in performance contracting.

Sarah Akers - Wells Fargo Securities

Thank you.

Carl Chapman

Thank you.


(Operator Instructions) And your next question comes from the line of Matt Tucker. Your line is now open.

Matt Tucker - KeyBanc Capital Markets

Hey, just a few follow-ups. You mentioned some interest expense being reallocated to infrastructure services as a result of the coal mining sale. And well, I guess, maybe could you just talk about how much that would be and would there be some additional expense that would be allocated to corporate?

Susan Hardwick

Matt, let me maybe just make a comment or two on that. I think, I said sort of in the punch line there, we certainly have anticipated this reallocation of interest in our expectations, both in total and by group. The reallocation of interest amongst the various groups, I would say is not hugely material for 2014. Not enough to really cause much of an impact on each of those groups.

An infrastructure services particularly, we said they expect to hit their expectations for the year taking into account a bit of additional interest allocated to them. Just another opportunities on their side have helped offset a little bit of an impact they might have seen from additional interest.

Matt Tucker - KeyBanc Capital Markets

Thanks. I guess, in the last year in infrastructure services, you had about $10 million of interest expense. Would you be willing to count on how much that would go up next year given kind of the annualized expenses being reallocated?

Susan Hardwick

Matt, at this point we’re not ready to talk about specific details on ‘15. We’ll certainly get into that level of detail when we do. I would just simply say again that we have anticipated impacts that could occur going forward as a result of the sale of the coal mining business and wouldn’t expect surprises there.

Matt Tucker - KeyBanc Capital Markets

Okay. I appreciate your slide on the EPA Clean Power Plant. I guess to sum it up, would it be fair to say that you don't anticipate having to make any significant investments, beyond what you’ve already done which has been significant and some of the plans that you’ve already announced.

Carl Chapman

I think the big issue, Matt, is it just too early to tell because the entire plan is done on a statewide basis. And so different than the other emissions issues that we’ve looked at and this one is different because it’s a statewide plan so that will be developed in a very different way because of it. What we’re trying to do is just remind of two things, one is we’re going to aggressively work to protect our customer in any allocation of the carbon cost.

Too early to tell what that will be but we’ll aggressively work to protect them. And then secondly, where we do have cost to get allocated, we also believe we have the opportunity for recovery of that under, either Senate bill 251, which is federal mandate or Senate bill 29, which is clean coal.

Matt Tucker - KeyBanc Capital Markets

Thanks. And just one last one, the $3.5 million in weather related increase in O&M. The Utility year-to-date that you called out, should we assume that it’s not recurring next year, assuming normal weather?

Carl Chapman

Yeah. Assuming normal weather, there is really no reason for it to recur. It would have been things like over time, would have also been where there might have been any additional maintenance issues that arose because of freezing and thawing, those kinds of thing. So they really -- any of those items, there is no reason for them to recur given normal weather.

Matt Tucker - KeyBanc Capital Markets

Sorry, I want to ask one more. You mentioned that reduction in the Indiana corporate tax rate looks like that benefited the Utility a little bit in the quarter. Should we assume a lower run rate going forward closer to this 35% and kind of 37%, 38% that we’ve been seeing over the past couple of years?

Susan Hardwick

Yeah. I think Matt, the effective tax rate for the quarter maybe a little bit lower than what we would anticipate for the year. There were few other items that favorably impacted taxes in the quarter. The state tax rate certainly is going to be an ongoing favorable impact. We would expect close to a 36% effective rate at the Utility for the year in ‘14. And I think that’s a pretty reasonable representation going forward, maybe a bit higher than that going forward.

Matt Tucker - KeyBanc Capital Markets

Great. Thanks a lot. That’s all I had.

Carl Chapman

Thank you.


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

Robert 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 today.


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

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