Vectren's (VVC) CEO Carl Chapman on Q4 2015 Results - Earnings Call Transcript

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Vectren Corporation (NYSE:VVC)

Q4 2015 Earnings Conference Call

February 23, 2016 02:00 PM ET

Executives

Naveed Mughal - IR

Carl Chapman - CEO

Susan Hardwick - CFO

Ron Christian - EVP, Chief Legal and External Affairs Officer

Analysts

Matt Tucker - KeyBanc Capital Markets

Sarah Akers - Wells Fargo

Joe Zhou - Avon Capital Advisors

Andy Levi - Avon Capital

Operator

Hello and welcome to Vectren 2015 Year-End Earnings Call and Webcast. All participants will be in listen only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note the event is being recorded.

I would now like to turn the conference over to Naveed Mughal. Please go ahead sir.

Naveed Mughal

Thank you, operator. Good afternoon and thank you for joining us on today’s call to review Vectren's 2015 results and 2016 outlook. This call is being webcast and shortly following its conclusion, a replay will be available on our Web site at www.vectren.com under the Investors link at the top of the page. Yesterday, we released our 2015 results and this morning we filed our Form 10-K with the SEC.

Under the Investors link on our Website, you can also find copies of the earnings release, today's slide presentation and the 10-Q. As further described on Slide 3, I would like to remind you that many of the statements we’ll make on this call are forward-looking statements. Actual results may differ materially from those discussed in this presentation. Also you will find a reconciliation of GAAP to non-GAAP measures at the end of event.

Carl Chapman, Vectren's Chairman, President and CEO, will provide opening comments on our 2015 financial results and 2016 earnings guidance. He will then turn it over to Susan Hardwick, Senior Vice President and CFO, who will review the outlook for our utility and non-utility businesses, and provide closing remarks. Also joining us on today's call is Ron Christian, Executive Vice President and Chief Legal and External Affairs Officer. Following the prepared remarks, we will be glad to answer questions you may have.

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

Carl Chapman

Thank you, Naveed. Thanks for joining us on our call today and we appreciate your continued interest in Vectren. Let’s turn to Slide 4 for a review of the 2015 results. Hopefully, one final time I’d like to remind everyone we’ve excluded Coal Mining in 2014 consolidated and non-utility results. 2015 consolidated earnings were $2.39 per share up nearly 5% compared to $2.28 per share in 2014 and 2015 results are up more than 6% when you consider the year-over-year difference and weather impacts on our utility business. This continues our consistent earnings growth trend that begin back in 2011 and continues to be supported by our strong utility results.

The Utility Group achieved earnings of $1.95 per share compared to 2014 earnings of $1.80 per share and continues to be the core driver of our earnings. In 2015, the Utility Group once again earned its overall return of approximately 10.3% which marks the fifth consecutive year of doing so. We’re very proud of this performance as it validates our solid regulatory and legislative strategies and our commitment to cost control. The improved 2015 utility results were primarily driven by increases in gas utility margin from Indiana and Ohio infrastructure replacement programs and a decrease in operating expenses related to the timing of the power plant maintenance projects. And as we’ve mentioned in our earnings release yesterday, we reported approximately $3.5 million of prior period R&D tax credits in the fourth quarter to help drive utility results above our $1.90 guidance midpoint.

On the non-utility side as we’ve been expecting all year, Energy Services returned to operating profitability in 2015. Similar to prior years included in VESCO’s bottom line results were benefits of energy efficiency tax deductions which totaled $0.07 per share at the VESCO level and $0.05 per share at the Vecrten level compared to $0.04 per share contribution in Vectren’s results in 2014. VESCO’s distribution construction business continue to perform above expectations, driven by the strong demand for gas utilities for product line replacement work. However it was a challenging year in the transmission construction business which Susan will further discuss shortly. We're very proud of our history of raising the dividend which we increased 5.3% in November, the 56th consecutive year of increase our balance sheet remains strong reflected in solid and stable credit ratings from both S&P and Moody's.

Let's turn to Slide 5 where we have confirmed our 2016 EPS guidance ranges. We still expect consolidated EPS to be in the range of 2.45 to 2.65 with the utility EPS guidance of $1.95 to $2.05. Growth at the utility will again be driven by a successful execution primarily our improved gas utility investment plans in both Indiana and Ohio. This combine with our continued focused on cost control should allow us to continue to earn at or near our allowed returns. Non-utility EPS is expected to be in the range of $0.57 to $0.60 this key is for both VISCO and VESCO to successfully convert the record high backlogs in our earnings. Also I want to note that we have not adjusted guidance to reflect the extension of energy efficiency tax deductions as we expect the impact to be much less in 2016.

Moving on to Slide 6. You will see our earnings since 2010 had a consistent growth trend, we expect to continue in 2016. In 2014 we announced an increased dividend and dividend growth target to 5% to 7% which is aligned with our earnings growth target. We’re excited about what does means for our investors as we believe our growing track record of consistent earnings of dividend growth as posed to continue.

On the Slide 7, we are affirming our long-term financial targets that we launched in November 2014. The utility business will continue to be Vectren's key driver of consistent earnings growth with expected earnings growth of 46%. As we've stated previously gas infrastructure opportunities both from utilities business and VESCO’s distribution construction business will continue to be our primary focus and will drive long-term consolidated earnings growth in the 5% to 7% range through 2020.

As Susan will cover in greater detail we continue to believe VESCO’s transmission business is position for a long-term growth based upon the amount of transmission pipeline maintenance work that needs to be performed across the country in order to adhere to increasingly stringent federal safety regulations. We expect competition to lessen for this maintenance work as scheduled new pipeline construction projects get underway. We’re also excited that VESCO’s returned the profitability in 2015 and demonstrated why we continue to believe in the long-term growth potential for this business. We believe these factors will drive 5% to 7% earnings growth and we anticipate also growing the dividend 5% to 7%. Combining the two, we believe our expected earnings growth and strong dividend position us to deliver annual total shareholders returns of 9% to 11%.

With that I'll turn it over to Susan who will review our 2016 utility and non-utility outlook. Susan?

Susan Hardwick

Thanks, Carl. Let's turn to Slide 9. As Carl mentioned the utility operations had another strong year led by returns on our growing gas infrastructure investment and lower O&M. In addition our utility group was again successful in meeting our safety and reliability targets. I'd like to take just a moment to commend our operations group for their hard work and dedication to providing safe and reliable energy service to our customers and for making Vectren's a very safe place to work.

For 2016 and beyond gas infrastructure investments will continue to be the driver of earnings growth. We expect to spend about 2.2 billion from 2016 to 2020 primarily in the gas business where we had investment plans filed and are awaiting the most recent orders from the Indiana commission. As we show in the chart at the bottom of that slide we expect 2016 to be a milestone year as the contribution from gas becomes more than half of our utility earnings. And based on our current outlook we expect our utility earnings to be about 65% gas and 35% electric by 2020.

Turning to Slide 10 and a quick regulatory update. First for both gas and electric parts of our business in Indiana we've had a long history of very good regulatory and legislative environment. For the gas business we have filed plans for our infrastructure replacement projects and those plans have been approved. Our Indiana plan as filed reflect about $1 billion of spend through 2020. We are waiting an order that will authorize the recovery of amounts for that latest tranche of spend. There are a few items still being debated in the plan, but overall we’re confident in our plan and our ability to execute the appropriate regulatory release.

In Ohio that regulatory and legislative environment continues to be supportive of gas infrastructure investment. Our distribution replacement rider is in place and we are busy performing the replacement work there. We anticipate filling our next base rate case in Ohio in late 2017 or early 2018 in conjunction with the end of the current five years extension of the DRR mechanism. And we've talked a lot about gas lately so let me spend some time on electric.

Moving on to Slide 11, and an overview of our Indiana integrated resource plan or IRP which we anticipate filing later this year. Indiana gets electric utility voluntarily submits an IRP every two years in the Indiana commission. The commission review each year IRP but does not approve it. The purpose of the IRP is to address long-term electric system liabilities throughout the states. At the bottom of that slide you can see a timeline of 2016 milestone relates to that IRP as of the case for all electric utility Vectren’s 2016 IRP involves many complexity and uncertainties related to significant, yet to be finalized federal regulations related to water, ash and carbon, earning this month as now the U.S. Supreme Court halted implementation of EPA's clean power plan pending resolution of federal legal challenges to that plan.

Also ALCOA, a large employer here in Southern Indiana recently announced it will close its aluminum smelter operation impacting approximately 600 employees. ALCOA who generates its own electricity for use in its aluminum operations is still contemplated its long-term strategy related to its generation facility which is comprising of four unites totaling nearly 800 megawatts for capacity. Vectren knows that 150 megawatts are about 50% of one of those units. While ALCOA is not currently a significant customer their decision on the future of the jointly owned generating unit will be a significant input to the IRP.

In addition our IRP contemplates the previously announced plan by one of our large customers SABIC to transition to a co-generation plant to meet a certain portion of its electricity needs at the end of 2016 or early in 2017. Based on what we know today as we’ve suggest recently in the mid to long term they were likely be substantial capital expenditures in the electric operations to address some or all of these issues. We would however expect to recover any required investment via existing mechanisms such as senate bill 251 and 29. Recall that we've had a philosophy of relatively flat electric rate based growth for some time, so many expenditures that come up as we resolved these issues well of course add to rate base. Now with that said, we hope to communicate the IRP's long-term strategy implications, including CapEx and financial targets in conjunction with our rollout of 2017 guidance later this year or early next.

Let's move on to Slide 12, I would like to take moment to discuss our initial thought on the bonus depreciation extension. In December 2015, congress extended, among other things, the bonus depreciation provision for five years retroactive to January 1, 2015 through now 2019. Our ongoing analysis of this extension and what it means to Vectren includes the potential impact to customer rates, accelerator incremental investment opportunities that maybe available and the potential to strengthen our balance sheet further. Our initial view point is that we expect to utilize the incremental cash of approximately $225 million over the next five years to delay plans financing associated with our current CapEx plan. We believe this will result in modestly positive EPS impact over the next five years since we do not expect any rate cases in Indiana in that time.

And note that rate base in Indiana is not impacted by deferred taxes, rather it is a new cost component of the capital structure and therefore have no impact on equity return on rate base under the assumption that the cost free cash just offsets long terms debt that would have otherwise been issued. Deferred taxes do reduce rate base in Ohio but since we don’t expect new rate base -- a new rate case in Ohio until later stages of our current five year forecast and because additional gas investments maybe needed at Ohio could be funded by cash from bonus, we believe the extension of bonus through 2019 should be modestly positive to overall EPS over the next five years.

Our next step will be to continue to analyze the potential impact of the extension it will have on our CapEx plan, especially as it relates to our significant gas infrastructure investments and any electric system needs that are driven by environmental regulations. Potential higher gas and/or electric CapEx could drive reconsideration of our use of any incremental cash from the bonus depreciation election in the near term. Of course as always we'll evaluate the impact of additional spend on customer rates as well.

On the subject of liquidity, Slide 13 is an overview of our current 2016 financing plan as you know Vectren has consistently maintained a strong balance sheet with high investment grade credit rating, we're targeting utility payout ratio of 70% with utility funds 85% to 95% of Vectren's dividend.

In 2016, we have some small debt maturity at the utility of about 30 million and the nonutility group of 60 million and you’ll recall we issued a $150 million of long-term debt in 2015 in anticipation of nonutility maturity in late ’15 and early ’16 that along the impact of the cash and the bonus depreciation extension resulted in no need to issue incremental long-term debt in ’16. Longer term we currently have no planned public equity offerings other than roughly 7 million a year from our DRIP program.

In addition to a significant amount of internal cash flow generation of utility we expect to fund rate based growth over the next five years with incremental debt financing of 250 million to 300 million and available cash flow from the non-utility businesses of approximately 200 million. However, the outcome of the IRP and any resulting spin could impact that in later years.

In closing on the utility Slide 14, demonstrates our track record of consistent utility earnings growth where we target 46% annual growth till 2020. This is the foundation of achieving our consolidated earnings goal of 5% to 7% and before I finish the utility discussion, you should note that in the appendix we’ve included a very high level utility earnings roll forwards from 2015 to 2016.

So in summary we had a very strong and compelling utility story that is focused long-term on gas infrastructure investment and is supported by constructive regulatory environment that allow for the opportunities to earn at or near our allowed return. We will watch closely the economy and evaluate any impact it may have on our customer, but we remain confident in our ability to achieve the utility guidance at this point of $2 per share in 2016.

Moving on to Slide 16, in our non-utility review where we’ll start with VESCO and its distribution construction business. The success of this business segment and its record revenue in 2015 is tied to the long-term demand of gas infrastructure programs and the high level of spend by utilities across the country. Utilities throughout the U.S. are in the midst of very similar investment programs just like our own utilities. And our distribution construction operation does much of that work for those utilities that is trying to do even more.

As you can see in the bar graph to meet this growing spend VESCO has increased the number of distribution crews it has employed from nearly 400 in 2011 to almost 650 crews in 2015. That’s nearly a 13% annual growth rate. In fact, we have ample work already lined up in 2016 to support record number of new crews this year. Looking specifically at the outlook for 2016 earlier this year we’ve renewed a five year advance and service agreement with our largest customer.

Before moving on to the next Slide, I’d like to point out the table at the bottom that shows the top five states where VESCO does distribution work and the announced gas infrastructure spend associated with the gas utilities at each of those states. We believe our core distribution footprint as can be seen on Slide 17 matches up very well with significant spend opportunities.

Now let's move on to Slide 18 and VESCOs Transmission Construction business. Despite the challenging macro environment in shale, gas and oil production, the transmission business had a solid year of revenue in 2015. However margins were significantly compressed as competition grew for pipeline integrity and maintenance work which is our core focus. As we previously discussed this is compounded when a significant maintenance contract was not renewed by a customer earlier in the year.

Looking ahead to 2016, we started the year off with signing a three year master services agreement with our largest customer to perform compressor station work. We continue to be very active in the bidding process for transmission work which helped bump our backlog slightly since September 30th even in the difficult market.

However I do want to note that we were not successful at landing the roughly $300 million of project bids we had out at the time of our third quarter call. This is simply further evidence of the strong competition in this sector currently and cancellation of the few large projects. But equally strong are the bidding opportunities and we will continue to pursue them aggressively. Finally, we do continue to caution that we expect significant losses at VESCO in the first half of 2016 particularly in the first quarter.

Turning to Slide 19 our long-term business model for the VESCO transmission business remain focused on pipeline maintenance and integrity work as you can see in the first graph 60% of our transmission business in 2015 is related to maintenance integrity of station work none of this work is tied to the exploration and production sector nor was the portion of the work in the 40% target. And looking ahead we continue to expect 80% to 90% of VESCO’s total revenues to be focused on maintenance and integrity related work not tied to the E&P sector.

Again just because VESCO’s distribution business is tied to E&P and only a portion of the transmission business is. As we’ve said previously in some years we will undertake larger new price projects as needed to maintain crew productivity or by customer request which may create some year-over-year earnings volatility. Our focus however continues to be on maintenance related work which allows for more consistent earnings.

Of our 14,000 miles of pipeline construction projects across the U.S. are expected to begin in mid ’16 through 2018 which should ease the competition for transition maintenance work. Within median oil price forecast by various experts expected to increase considerably by 2018 we would expect additional 2018 pipeline projects to be announced once the permitting process begins.

Overall we remain focused on the long cycle of construction maintenance and integrity work that is expected as pipeline companies continue to invest in safety related maintenance and integrity work driven by federal regulations.

Moving on to Slide 20, as expected -- as we expected 2015 marked a great turnaround year for VESCO. VESCO ended the year very strong achieving record new orders of nearly $260 million which was over 35% more than our 2014 record. VESCO returned to profitability with operating earnings of 1.2 million including the impact from 179D energy efficiency deductions that were also extended in late 2015, now through 2016.

Backlog as shown in the bar graph in the bottom points to continued solid revenue and earnings growth in 2016. The focus in 2016 will be on project execution and rebuilding the sales funnel. I also want to point out that the changes in the tax code made in late 2015 will reduce the 179D contributions to earnings in ’16 by about half compared to 2015 based on our current estimates due to a change in the efficiency standard by which projects are compared.

For long term we expect VESCO’s demand drivers of energy efficiency and security and sustainable infrastructure including renewables to remain strong as the nation continues to use energy more wisely. Slide 21 highlights a few of VESCO’s key projects that are underway. I won’t cover the details but I will say these projects represent a wide sector of what VESCO does across this sectors and the positive momentum we’re seeing in the business including University of Illinois project just signed in the fourth quarter and the very significant opportunities we see in the wastewater treatment market.

Turning Slide 23, I wouldn’t reiterate our view that Vectren is positioned for continued strong consistent earnings and dividend growth. Infrastructure work and energy efficiency are common threats across our entire business model particularly as we invest in our businesses related long-term horizon in mind.

We believe these two corner stones are fundamental to the changing energy landscape in United States over the next 20 years as businesses and companies alike take to invest in safe, reliable and sustainable solutions. As Carl mentioned we have affirmed our 2016 earnings guidance we rolled out last November. On the utility side we have a strong road track for our gas infrastructure programs but with the ever present risk of an economic slowdown, we remain comfortable as the 2016 EPS midpoints guidance of $2 even after finishing 2015 at the upper end of our earnings range at 1.95 per share.

On the non-utility side, we believe there are some upside opportunity at of VESCO’s from 179D and the successful conversion of backlog. However we are also leaving our non-utility guidance range unchanged as we continue to monitor the down side risk to VESCO from continued low oil prices.

Finally, I see it's appropriate as the CFO to ramp up with the few thoughts on valuation. As you can see our five year growth is 8.1% versus our targeted of 5% to 7%. Over that period we have done what we have said we would, we've exited certain non-utility business that didn’t meet our long-term goal. We produced consistent earnings growth, we’ve set forth a strategy to achieve higher growth target and we've extended our streak of dividend increases to an enviable 56 years.

While our stock has performed well in February, it’s performance over the last few months overall has been subpar. Our goal is to be at top cortile performer relative to our peers, which we believe is merited for the reasons I just mentioned, all of which come back to our foundation. The hard work we've done to elevate our utility as a premier franchise.

A few typical educators evaluation off course are relative to PE and dividend yields our analysis tells us that we are currently discounted compare to medium PE and dividend yields let alone to top cortile. As a single example, if you simply looked at our current dividend yield of 3.5% compared to our peer meeting of roughly 3.1 a significant discount is apparent since 85% to 90% of our dividend is under buyer and has very strong utility. Of course this discount maybe a temporally dislocation that will resolve itself overtime, but we certainly think the fundamental are in place to allow for appropriate value in the marketplace.

And with that operator we are now ready for questions.

Question-and-Answer Session

Operator

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question comes from Matt Tucker with KeyBanc Capital Markets.

Matt Tucker

I wanted to start at VESCO’s, I think we are on the same page in terms of the wave of large pipeline projects that could be coming over the next couple of years at least I guess are you starting to see any change in the competitive environment as these projects get closer and if not when are you expecting that to impact your business?

Carl Chapman

Well I think as you noted we really have said the same thing here for a while, we've really think that the second half of 2016, not seeing a whole lot of that at this point we did mentioned or Susan mentioned in her comments that some of the 300 million that we didn’t receive we really believe was due to some delay or cancellation of project. So that can happen and so that maybe a reason we're not seeing it yet. We still -- everything we continue is these producers want to move their gas and oil out of certain markets and that these projects will get build obviously timing can continue to move a bit but we feel really comfortable that we’re going to start to see a significant uptick in that big pipes spend and then we think that will have an impact on the maintenance work.

Matt Tucker

Got it, thanks Carl. And then you mentioned expecting a loss in the first half at VESCO, I guess in the first quarter that's kind of normal based on seasonality in the second quarter less so, are you -- just to clarify are you expecting a loss there in the second quarter?

Carl Chapman

Well. We really don’t give any quarterly guidance as you know, so all we’ve said at this point is what we’re prepare to say is we believe that to be a loss for the first half and that could be significant in the first quarter and since we don’t give quarterly guidance that’s really all we’re prepared to comment on.

Matt Tucker

Fair enough. I guess could you just kind of help me kind of reconcile your comments about adding crudes at VESCO and it sounds like you are still pretty cautious on the first half are you concerned about locking in labor for when things do pick up or could you help us understand why are you adding crews now?

Carl Chapman

Yes. The commentary that Susan provided there was really related to the distribution side of the business and things can happen in timing wise, as the example there was obviously a lot of snow in the mid-Atlantic and that has a big impact on that your ability to lay pipe. So that can has an impact, but in terms of when we were talking about adding crudes in the distribution side and I believe Susan made the comment that we already believe we have business lined up that would cause us to add a record number of crews and that's just while we've added into the business at this point. We were not seeing any problems in adding the crudes that we need to get that work done.

Matt Tucker

Thank you for that clarification that makes sense and I guess just last on when you initiated 2016 guidance on your last call you had provided some segment specific guidance for both VISCO and VESCO, should we consider those numbers are still good or has the mix between the two segments shifted at all?

Carl Chapman

I think by the fact that we didn't provide them, we're really saying they’re basically the same. We've already commented there could be some changes here and there, we obviously didn't have 179 D when we're doing that but Susan already commented that we expect that to a lot smaller than ’ 15. So there could be some pluses and minuses in minor amounts, but we felt like they’re close to what we would use and then felt like it’s appropriate to just not repeat them and they're basically where they were before.

Operator

Thank you. [Operator Instructions] We do have a question from Sarah Akers with Wells Fargo.

Sarah Akers

Just a quick follow-up to one of Matt's question, did the initial VISCO earnings guidance, I think it was 43 million for ’16, did that assume a loss for in the first half of the year as well or is that a new development on this call?

Carl Chapman

No, I think that's probably what our expectations would have been all along for that first half and again as Matt said the first quarter is always have some impact there then you get into -- some weather and other things could impact it, but we would have always expected by the fact that we said we saw things changing in the second half of ’16 that that loss would have been there.

Operator

Thank you. And the next question comes from Joe Zhou with Avon Capital Advisors.

Joe Zhou

So I have a follow-up on VISCO, so with current oil and natural gas price being so low and the margin as getting squeezed significantly in ’15, in your ’16 guidance do you resume a recovery of the oil and gas price to reach where you expected it to be in the VISCO sector? Thank you.

Carl Chapman

Sure and thanks. Really we commented two things. One is, as Susan covered, we see that the direct relationship to E&P is in that 80% to 90% range, so first off that oil and gas would have the same impact on us as perhaps some other contractors. So that’d be the first comment. But the second one would be is we really haven’t anticipated big recovery oil and gas, what we're anticipating is that those pipes will get build that have announced and we try to lay those out what our expectations were for those pipes by year that 14,000 miles and we continue to believe that will start in the second half of 16.

Operator

Thank you. And we have a follow-up question from Matt Tucker with KeyBanc Capital Markets.

Matt Tucker

Just a couple of quick follow-ups, first VISCO the three year MSA that you've mentioned, should we consider that as additive to your revenue run rate or is that more kind of locking in work that you had already been doing?

Carl Chapman

That would really be more locking in what we've been doing, we mentioned I believe it’s our largest customer and of course that is on the transmission side, we also locked in a five-year master service agreement on the distribution side again, not new business but very big news in both of those contracts but locked them in for a long period of time.

Matt Tucker

And then at the utility side and with the IRP you've mentioned the ALCOA restructuring, would it be possible to discuss what the most likely scenarios are that could come out of that?

Carl Chapman

I think that we could them in a very small grouping really. I mean obviously what they're looking at, we're dependent on what they want to do. The issue there is that were two operations. One was a smelter and that's what they announced to shut down. That was much larger of power just because it's a smelter and then other one which will continue and hopefully grow is the rolling operation.

And so they’ll need power for that, but really it's way too early for us to be able speculate as to exactly what their plans are going to be and how that might unfold obviously it could be a situation just in terms of, what are the options could be a situation where it would continue to be worked for is what it’s knows as that we mentioned we have 150 megawatts of that we continue in a split ownership, could continue in other fashions. There really is no way to know at this point and really what we would prefer to say Matt is while we can speculate, we'd be better off I think to just say, we look at that as just rolling it into the IRP and we’ll factor in what the various options could be from that plant at that time.

Matt Tucker

Thank and I had a similar question on the loss of the large customer, just kind of what the options might be? Although it sounds like maybe we'll have to wait, but if you're able to comment on that at all?

Carl Chapman

Matt are you speaking of SABIC?

Matt Tucker

Yes.

Carl Chapman

We’ve actually disclosed that. I think it probably would be all the way back maybe at least two years maybe three years ago. There is really no change there. SABIC made the decision to do a co-gen we worked very aggressively to retain that load and we just weren’t able to come to agreement even though we think we have very good offer on the table. And so a portion of that moves to co-gen sometime in late ’16 or could be early’17, but it moves to co-gen. We’ll retain some portion of the load, the same amount that we always knew and then also we’ll have backup to that facility. But that is not -- nothing new there that we haven’t always anticipated, we were just trying to say that we’ll factor that into our IRP because some power will free up.

Operator

Thank you. And the next question comes from Andy Levi with Avon Capital.

Andy Levi

On the bonus depreciation, I wasn't 100% clear. So, I understand that in the short run, because of the way Indiana is set up, and I guess in Ohio you're not filing a rate case, there's no impact. In fact, it's a positive because it obviously gives you cash, but doesn't affect your rate case. But longer term, can you give us some type of impact of whenever it is that you have to file a rate case in both Ohio and Indiana, what would be the impact of bonus depreciation on rate base?

Susan Hardwick

Let me comment just a little bit further on that, as we’ve said about 225 million or so of additional cash that will come from this bonus election over the next five years and again our thinking just initially would be that we’ll use that to delays planned financing on the capital expenditures that we have currently planned. And as I mentioned in Indiana cost rate capital is an element of cash structure and under the assumption that we’re just trading out cost rate for debt to otherwise be issued, there really is no impact on earnings on rate base or equity on rate base. So don’t anticipate any impacts there and we don’t anticipate a rate case in Indiana and so 2020 probably at the end of our seven year program, so really [multiple speakers] significant impact.

Andy Levi

But when you do file a rate case in Indiana, whenever it may be, 2020, 2025, whatever it is, is there a true-up for the bonus? I guess that's what I'm trying to figure out.

Susan Hardwick

Well, at that point whatever level of cost free capital differed taxes whatever level we have at that time will be an element of cash structure, so yes it will be included in our overall capital structure at that time.

Andy Levi

Does it accumulate over time? Do you understand -- so, you stay outside the areas, but you get five years of bonus, so at some point there's some type of true-up? Is that correct or incorrect?

Susan Hardwick

Really not, that’s not how it works. It really will be that point in time, at the time we do a rate case we’ll establish the cap structure at that date, whatever that balance sheet date is. And the level of deferred taxes on the balance sheet will be that element on cash structure. So, obviously it's going to build over time, but it will start to turnaround, we’ve had bonus depreciation for many number of years now and overtime that will start to turn around so deferred taxes will start to go the other direction. So whatever balance is on the balance sheet at that time will be an element of cap structure when we file that case.

Andy Levi

They turn around as you're using it; is that basically how it goes? I'm just trying to understand.

Susan Hardwick

It turns around as the book life on assets crosses over the tax life, so we obviously use a shorter tax life that what accumulates these tax differences. And so as we cross over to that period it starts to turnaround and taxes will in fact be the payable to the government.

Andy Levi

So, based on the way you steer this [ph] [technical difficulty] there would be no adjustment downward in rate base for bonus depreciation; is that what you're saying?

Susan Hardwick

It will be whatever the level of deferred taxes are at the time we do that rate case, so yes when we establish the cap structure so the balance of deferred taxes, equity and long term debt will establish the capital structure at the time of the case.

Andy Levi

I'm not -- I'm just not clear why it's not a yes or no on an amount [technical difficulty] slow?

Carl Chapman

Could you say that again, actually you broke up.

Andy Levi

I'm just wondering -- not understanding why the answer is not a yes or a no. I'm not understanding the answer. Maybe that's because I just don't understand it, and it has nothing to do with you guys, has to do with me. But wouldn't it just be a simple kind of yes or no, or I guess it's not that simple?

Carl Chapman

Well again I think just expanding a little bit what Susan said actually what happens to that turnaround she described happens in essence over a long period of time because you’re talking about the long lived assets here, tax life or book life. So that happens over a periods of time. But what we tried to describe earlier in terms of what happens in Indiana is we really are seeing it as literally replacing debt with deferred taxes and therefore the equity component would be remaining the same and so we would see that it’s the equity returned that doesn’t change in and that's how we should be looking at even when you’re on a rate case.

Andy Levi

Okay. That explains it. Then Ohio is such a small subsidiary, that it's just not impactful longer term.

Carl Chapman

It’s smaller but it does have some impact. The reason we commented on it, and Susan got into it earlier is simply because in Ohio it's a deduct from rate base as compared to Indiana, it's in the capital structure.

Andy Levi

I got it. Okay. Thank you. And then just a follow-up -- I apologize, just a follow-up on -- Joe and I worked together, but I'm out of the office today. So, just on the VISCO business, just to understand overall, with commodity prices so low, is there like a squeeze going on, so you bid for something, obviously the client revenues are lower, whether they are farming natural gas or they're farming oil, and obviously they want to get to market, but their margins are squeezed. So, does that turn around [technical difficulty] what you’re too?

Carl Chapman

How we see this working is, first of all, we've already commented that we have a low percentage coming from directly related to E&P.

Andy Levi

Right, I understand that.

Carl Chapman

So that's the first thing. Then the next thing really is that though having said that, some of those companies that spend all their time in that area have come into the maintenance area where we prefer to see our work and they have squeezed margins down and the reason they've really done that is because they also anticipate the ’16 to ’18 big build and by anticipating that they're willing to take a lower margin so they can keep their workers busy while they're waiting for the big spend to come and they come into our space, that drives down margin. When we see this big spend start to pick back up in the second half of 2016, 2017, 2018 then we believe that margins will rise, we have not suggested it'll come back to where they were but we definitely said we think they would rise over that period of time.

Andy Levi

[Technical difficulty] how long these have declined, like what percent, and is it a gross margin that we should be focused on?

Carl Chapman

Actually what we do is we provide, in our metrics each quarter, we provide the gross margin for the overall fiscal business. Now we do not provide the split between distribution and transmission, simply because that is just a competitive issue for us. We obviously do not want to share our margin percentages by business for competitive reason, but we do share the overall margin for the business, so that you can have a sense of how the business is trending.

Andy Levi

You got to give us at a very high level, how much margins have come down from, let's say, a year or two ago?

Carl Chapman

Well, again, that would be in our deck that we provided and what we showed is for the 12 months ended December 31, ’14. The gross margin was 17.5% and ’15 it was 14.5%. That gives you some sense.

Andy Levi

I apologize, I'm not in the office. I don’t have the deck on me.

Carl Chapman

No problem.

Andy Levi

That's very helpful. Sorry I asked so many questions but that definitely -- I've figured everything out now. Thank you very much.

Carl Chapman

No problem at all.

Operator

Thank you. And this concludes our question and answer session. I would like to turn the call back over to Naveed Mughal for any closing remarks.

Naveed Mughal

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

Operator

Thank you. This conference is now concluded. Thank you for attending today's presentation, you may now disconnect.

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