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Vectren Corporation (NYSE:VVC)

Q4 FY07 Earnings Call

January 30, 2008, 7:15 PM ET

Executives

Steven M. Schein - VP, IR

Niel C. Ellerbrook - Chairman, President and CEO

Carl L. Chapman - President and COO

Jerome A. Benkert Jr. - EVP and CFO

Analysts

Barry Klein - Citi

Dave Parker - Robert W. Baird

Selman Akyol - Stifel Nicolaus

Operator

Good afternoon. My name is Tekia [ph], and I'll be your conference operator today. At this time, I would like to welcome everyone to the Vectren 2007 year-end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Steve Schein, you may begin your conference.

Steven M. Schein - Vice President, Investor Relations

Thank you and good afternoon everyone. On behalf of Vectren we would welcome you to our conference call. This call is being webcast and accompanying slides are available on our website at vectren.com. I would also like to remind you that some of the statements made on this call will be forward-looking statements and they are subject to risk and uncertainties that could cause actual results to differ materially from those discussed in the presentation. Please refer to our Form 10-Q quarterly report for the third quarter of 2007, which discusses forward-looking statements in more detail. Today you will be hearing from Niel Ellerbrook, our Chairman and CEO. We also have several members of our management team present, including Carl Chapman, President and Chief Operating Officer, Jerry Benkert, Executive Vice President and Chief Financial Officer, and Ron Christian, Executive Vice President, General Counsel and Secretary.

With that I will turn it over to Niel.

Niel C. Ellerbrook - Chairman, President and Chief Executive Officer

Thanks, Steve. I'm going to make a few fairly brief comments and rely on the press release in large part and then we will respond to any questions of the presentation or the press release may have generated. Overall, 2007 was indeed an excellent year. We reported $0.53 for the fourth quarter and $1.89 for the full year versus $0.46 and $1.44 a year ago. Without synfuels we were $0.60 for the quarter and $1.85. The $1.85 is of course right in the middle of the guidance range we previously shared of $1.80 to $1.90.

I will share a few more thoughts in 2007 but as a reminder, for 2008 we are expecting earnings in the range of $1.85 to $2.05 and in 2009 we're targeting growth of 5% or more over 2008. And of course our record of 48 consecutive years of dividend increases continues. The Board increase the quarterly dividend paid beginning December 1 by 3.2% from $0.315 to $0.325 per share.

Turning to the next slide, slide 4, I want to remind you of the appendix to this report where you will find some great detail which should help you understand the business assumptions which form the basis for our 2008 guidance. 2007 utility earnings were $1.40, up $0.19 from 2006. This slide lists a number of factors contributing to the increase but I’ll particularly highlight the Electric and South gas base rate increases implemented in August, which will also help us achieve our 2008 targets by the way. And of course, the decoupling tariffs we've an effect in all three gas jurisdictions. Nonutility earnings excluding synfuels grew from $0.33 to $0.45 per share. We grew at over 13% even after considering the effect of the litigation charge we took in the fourth quarter of 2006. I’ll particularly highlight the infrastructure businesses with both Miller and Energy Systems Group had terrific years.

Next slide, taking a closer look at the utilities, we're targeting at least a repeat of the outstanding year we had in 2007. We will see the continued favorable effects of the August '07 Electric and South gas base rate increases. By early in the second quarter we should begin to see the effects of the Indiana North rate increase having filed a settlement in that case late last year and by late in 2008 we should have an order in our Ohio gas case. As a reminder, the weather helped us net $0.04 in 2007. I also want to alert you the expectation beginning in the first quarter and throughout 2008 you will see growth in our O&M spend as we address certain system maintenance and reliability issues, as well as certain labor issues, which we… have been brought on by our aging workforce. This additional spend was contemplated in the [inaudible] rate relief and is also contemplated in our earnings guidance.

Turning to slide 6, we should see very a good growth in our non-utility businesses in 08'. We expect to achieve that growth by adding storage capacity for ProLiance and ProLiance optimizing that capacity, and a return to more historically normal gas price volatility particularly in the fourth quarter. Coal operations should see a return to more normal productivity, which will allow us to produce a net additional 100,000 tons with only very modest additional cost and also we will see contract price increases and changes in contracts eliminating SO2 coal penalties… content penalties which we faced this year.

We expect to see a continuation of the business success at both Miller and Energy Systems Group. Market opportunities are growing because of continuing emphasis on pipeline integrity, and energy conservation and the growing demand for renewables, all will contribute to more opportunity for our infrastructure businesses. And again, please see the waterfall charts in the appendix for a better understanding of each of these factors.

Let's turn to slide 7 and in conclusion we are not resting on the success of 2007. We believe much of what we have accomplished in 2007 will contribute to success in 2008 and beyond. And just as what we expect to accomplish in 2008 will contribute not only to success in 2008 but to 2009 and beyond as well as we complete the rate relief that I discussed earlier and add to our asset base.

With that, I think I'm going to stop and we would be happy to respond to any of your questions.

Question and Answer

Operator

[Operator Instructions] Your first question comes from Faisel Khan with Citi.

Barry Klein - Citigroup

This is actually Barry Klein over at Citi. Couple of questions first on the coal mining, the revenues are going up, are we… should we also see costs going up with the new safety regulations getting put in place?

Niel C. Ellerbrook - Chairman, President and Chief Executive Officer

[inaudible] a good question and we certainly saw some cost increases in 2007. Carl, why don't you talk a little bit about what we might expect to see in 2008?

Carl L. Chapman - President and Chief Operating Officer

Yes, and Barry, just again on the slide 11, in the appendix, we've given you a waterfall that we will show you how we've broken this down. And you are right, we've got the contract price increases and the elimination of the SO2 penalties and some increase productivity as Neil mentioned a 100,000 tons but then we've included some additional mining and fuel costs. Obviously, we'll get some higher diesel fuel costs at the surface mine but mostly some additional cost from additional regulation. Some of that can be passed through to customers based upon changes in law and some of those costs are more about just routine inspections and can be, but we got hit pretty hard in 2008. And you can see on the waterfall that we've included some additional costs beyond that and we feel like we factored in those costs.

Niel C. Ellerbrook - Chairman, President and Chief Executive Officer

Yeah, it hit hard in 2007.

Carl L. Chapman - President and Chief Operating Officer

I'm sorry. It hit hard in 2007, my mistake and then we factored in additional cost beyond that in 2008.

Barry Klein - Citigroup

And beyond 2008, those will be continuing types of charges?

Niel C. Ellerbrook - Chairman, President and Chief Executive Officer

Well, again, I think it's a little bit difficult. There would be some continuing. It’s a little bit difficult to predict right now because just a lot of uncertainty with the inspectors having all their rules nailed down, as those become clear, I think some of those costs could go away. But we'll see continued additional cost from inspection costs, our rotational inspections.

Barry Klein - Citigroup

Okay. And with regard to the Vectren North rate settlement the $16.3 million is for the base rate increase, the additional… how would you qualify that additional $10.6 million in costs, are those just purely tied to increases in expenses or is that all… should that be treated like the base rate increase?

Niel C. Ellerbrook - Chairman, President and Chief Executive Officer

Yes. Jerry, why don't you address that?

Jerome A. Benkert Jr. - Executive Vice President and Chief Financial Officer

Barry, that will be increased expenses that similar to all the other cases have been built into the base rate increase itself. And we've got on the overall slide, I think, slide 9 likewise certain waterfall chart that builds up the consolidated earnings but net for the rate cases themselves, the North case which should be in place for the better part of the year, the Ohio case which comes on very late and I think Niel commented that the cases that were resolved in August this year will be a full 12-month this year. We’ve suggested that those should produce $0.17 net and that's reduced by those cost increases.

Barry Klein - Citigroup

Okay. I got you. All right. Thanks a lot.

Operator

[Operator Instructions] Your next question comes from Dave Parker with Robert W. Baird.

Dave Parker - Robert W. Baird

Hi, good afternoon. Thanks for the new detail, it’s not only is it visually pleasing, it's very informative. I appreciate it. Thank you. A question… could you just give us an update just on some of the construction activity at the new mines?

Niel C. Ellerbrook - Chairman, President and Chief Executive Officer

Sure. Carl?

Carl L. Chapman - President and Chief Operating Officer

Yes, Dave. I think the activity is going well. We had shared, when we were out in New York that we had gotten the last permit that we needed to break ground and we think we are on track for what we had shared previously for the mine to open in 2009 and for the second mine in 2010. So it's on track, again construction going well obviously, very early in the construction here but going well at this point.

Dave Parker - Robert W. Baird

Okay, and Miller Pipeline had a great year and by the way congratulations on a great fourth quarter and a great year, what… could you give us an update on just the environment there as well?

Niel C. Ellerbrook - Chairman, President and Chief Executive Officer

Yes, we feel really good about what we're seeing, I think while pipeline integrity was maybe a bit higher this year because it was the last year of the first phase, we are now moving into the second phase, the second five-year period of pipeline integrity and we're seeing a lot of activity, also a lot of activity from bare steel and cast iron, including our own filings that we've discussed, and then there are also a number of other programs, riser programs in Ohio that some of our larger customers have announced. So, we think between the pipeline integrity just the ageing infrastructure pipeline integrity bare steel, cast iron and risers, we feel really good about the market we are in.

Dave Parker - Robert W. Baird

Okay, very good and did you identify in any one of these charts, what you expect as our customer growth will be for, I guess blended rate for the utilities for electric and gas?

Jerome A. Benkert Jr. - Executive Vice President and Chief Financial Officer

Dave, I think the customer growth is probably in the 0.5% range or so.

Dave Parker - Robert W. Baird

Okay, all right great. Thanks very much.

Operator

There is a follow-up question from Faisel Khan.

Barry Klein - Citi

Sorry, I tried to get out of it, and other buttons to get out, sorry about that.

Niel C. Ellerbrook - Chairman, President and Chief Executive Officer

Okay, No problem.

Operator

[Operator Instructions] Your next question comes from Selman Akyol with Stifel Nicolaus.

Selman Akyol - Stifel Nicolaus

Thanks, just a quick question on ESG, in terms of the new sales contracts and you sort of forecasted backlog at the end of 2008, are these smaller contracts, and you're going after number of them, are these larger contracts there, if you don't get one that would dramatically change how the end is?

Niel C. Ellerbrook - Chairman, President and Chief Executive Officer

I think Selman, we certainly have large contracts, but I would say for the most part it's a lot of smaller contracts. Over time, our contracts have climbed a bit as people have been more interested in conservation and a large one will always help us, but again for the most part it is a buildup of a number of contracts and also a lot of repeat contracts.

Selman Akyol - Stifel Nicolaus

Okay, thanks very much.

Operator

[Operator Instructions] There is a follow-up question from Faisel Khan with Citi.

Barry Klein - Citi

Hi, just I really have a question guys. The margin from the wholesale power marketing, its included in your release in the utility group discussion, that is, would that be above and beyond any regulated earnings and that would that… wouldn't typically be included in your regulatory returns? Or is that part of your regulatory returns for your electric business?

Niel C. Ellerbrook - Chairman, President and Chief Executive Officer

Barry, it’s part of the regulatory returns, it was… we worked in just slightly over $10 million in to our base rate case and more allowed to retain and share and 50% of volumes or sales above that number and likewise customers will share 50% the level but we include that as part of our electric company returns.

Barry Klein - Citi

And is that a number that we should… we could expect going forward, or will that fluctuate?

Niel C. Ellerbrook - Chairman, President and Chief Executive Officer

Well, certainly, it has the opportunity to fluctuate, but I think we would consider it to be a reasonably representative level.

Barry Klein - Citi

Okay. Thanks.

Operator

[Operator Instructions] There are no questions at this time.

Steven M. Schein - Vice President, Investor Relations

Well, we thank all of you for your participation. We think '07 was an excellent year as Niel said. We also think that '08 was very promising as well and we looking forward to discussing Vectren with you in the future. Operator, that does conclude our call.

Operator

Thank you for participating in today's Vectren's 2007 year-end conference call. This call will be available for replay beginning at 4 PM Eastern Time through today… through February 6, 2008. The Conference ID number for the replay is 30331685. Again, the conference ID number for the replay is 30331685. The number to dial for the replay is 1-800-642-1687 or 1-706-645-9291. This concludes today’s conference call. You may now disconnect.

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