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Executives

Steven M. Schein - VP - IR

Jerome A. Benkert, Jr. - EVP and CFO

Carl L. Chapman - President and COO

Niel C. Ellerbrook - Chairman and CEO

Analysts

David Parker - Robert Baird

Chris Shelton - Millennium Partners

Oliver King - Zimmer Lucas

Gabe Moreen - Merrill Lynch

Vectran Corporation (VVC) Q2 FY08 Earnings Call August 1, 2008 9:00 AM ET

Operator

Good morning my name is April and I will be your conference operator today. At this time, I'd like to welcome every one to the Vectren Quarterly Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remark there will be a question-and-answer session. [Operator Instructions]. Thank you.

I will now turn the conference over to Mr. Schein, Vice President, Investor Relations.

Steven M. Schein - Vice President - Investor Relations

Thank you, and good morning. On behalf of Vectren, we welcome all of you to our second quarter 2008 conference call. As a reminder this call is being webcast and would be having accompanying slides on our website.

I would also like to remind you that some of the statements we will make on this call are forward-looking statements. They are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the presentation. Please refer to page two of our slide presentation also, our earnings release and then our 10-K for more detail regarding forward-looking statements.

With us today on the call we will have Niel Ellerbrook, our Chairman and CEO; Carl Chapman our Chief Operating Officer; Jerry Benkert, our Chief Financial Officer; and Ron Christian, General Counsel and Secretary.

With that, I will turn it over to Jerry to begin our presentation.

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

Good morning and thank you, Steve. In looking over an analyst report this morning I saw a survey closing phrase that was if I read it to you, it's simply, expected continued solid utility results and improved coal mining results with improved pricing. Now that would certainly be the clipped notes version of the call this morning. But that does pick up a couple of the key themes.

I'm going to start off with just a review of the actual results and maybe a little bit of discussion of the utility outlook. I can tell you that Carl for his part will focus in some depth on the look at our coal mining operations in ProLiance for '09 and beyond. And then Niel will certainly wrap it up and pull together the guidance and otherwise.

So, if we pick up on slide three, you can see that the utility operations came in at $8.8 million up from $8 million on the quarter and more they are showing even a stronger difference year-over-year but last year benefited a bit from weather. Over the six month period, you can see the very nice results, $66.8 million up from $58 million a year prior.

And we had put out a release a little bit earlier this month to talk about non-utility earnings in the quarter for that matter. And I think we talked about in that release that the utility would be up. So, we are consistent with that but the non-utility group would post up a loss. And so, here we show for the three month period of $4 million loss for the six months and it's been a fairly difficult start on the year, $2.3 million.

Certainly the utility has benefited from the rate cases that are in place. From the stabilization methods that are in place, we serve the various Indiana rate cases phasing in. And an Ohio case yet to resolve that will pay-off hopefully late this year into 2009. We also had some higher operating costs as planned around maintenance and reliability.

On the non-utility side, certainly the biggest impact has been the more limited opportunity for ProLiance. The coal-mining is down some and we have a slower start to energy infrastructure services this year also.

If you would turn to page four, quick look on the utility side. Again, this is simply a walk forward reconciliation from 2007 to 2008. The weather was not very significant because it's limited to just our electric territory in the gas side in Ohio, but all the same a bit stronger last year. From the margin standpoint on the line labeled regulatory strategy again very significant adds to top-line margins here, $0.09 on the quarter, $0.21 on the six months and so you can also see how it earmarked for the reasons I stated earlier but certainly not as high as the margin increases.

Turning to slide five, quick look at the non-utility. And again this just looks at a walk forward in three months and six months and the most significant difference between last year and this is certainly on the energy marketing and services line, but we also show the overall year-to-date results.

Coal Mining itself had a slow and actually posted a loss on the first six months on some production losses due to roof falls and the roofing structures and higher diesel cost. I can tell you for the coal mining operations we expect to show modest earnings on the year itself. And we think production will increase in the last six months of the year, ensure, approved and revised mining plan. We've put in place some red light, green light, systems that just allow us to produce a higher level.

Energy Marketing Services for the six months, remainder of the year I think we expect results more similar to last year and so those will grow also. Energy infrastructure services lapped [ph] at the end of that conversation and what I'd say is last year was very, very nice year if you look back. And when Niel shares the guidance for the rest of the year you will see we have high expectations for those businesses. So maybe the short comment would be simply off to a little bit of a slow start, large contracts coming at a Board meeting yesterday we approved a contract for more than $40 million for Energy Systems Group. I know Carl will touch on these businesses also.

Then lastly, just looking at the utility outlook overall, I would like to make a few comments around the economy and otherwise; but just as to start it off of course, the basic utility business is performing very, very nicely for us. And what really is becoming a bit more of a difficult environment, more difficult economy. We are looking ahead to this winter the gas cost and the billings that maybe coming up for predicting 25% to 30% higher, now consider what may have been purchase to date or hedged and looking at the forward price curve. Now, only a few weeks ago, we thought that level of increase would be sharply higher than this. And that 25% to 30% based on the current market it still has some significance to it and some customers may struggle paying some bills. And its certainly not as high as what we were once concerned with.

If I was to comment on bad debts and a few other of our rate making pieces around stabilization. Just a reminder that we do have decoupling tariffs on the gas side. So if there is reduced consumption or reduced... or impacts of conservation, paying off and reductions, our margins are protected there.

On the bad debt side again another item where I have said, we've set apart some... we really have pretty nice protection around bad debts. In Ohio, we are 100% covered in tract. In Indiana, I think I have shared previously that we are on tract for increases in the cost of gas so those are tract proof.

To be a little bit more specific though they are actually paying bad debt rate, and our rates are fairly slower at 0.65% in the South territory and 0.9% in the North. And we're either close to those or in the case of point of the North, actually running just a little bit below that rate. But if in an environment of higher gas costs, these rates of customers unable to pay grew significantly then there is some risk there. And just to give you a bit of a real comment [ph] gas was priced at $10 and we ran over these rates by 0.25%. We have a risk of approximately $2.5 million.

So I'd roll that up and with the comment that electric collections are generally are pretty reliable. And say that there could be some risk here. But for the most part we are pretty well protected on the bad debt side.

As to the Ohio rate case, very quickly I think we are progressing on track. We've filed for $27 million. One of the significant actions in Ohio is the staff report. When that's produced, it came out June 16th. And it becomes a sort of a starting point for parties to take positions and try to negotiate and ultimately work for an order to come out.

They proposed a revenue increase of $10.7 million to $12.6 million. They supported a form of rate design that was straight, fixed, variable or moving towards straight, fixed, variable. We have decoupling today. This is just another method of taking volumetric risk out of rates. But in the case of straight, fixed, variable ultimately if you were fully on it, it will also remove weather risk. So their proposal was to move partially down that path in lieu of decoupling.

And then lastly they supported a rather robust. They're still cast on it and replacement program and then Ohio riser replacement program for those new investments would detract. So overall we felt that's a good starting point, the South reported itself. These approaches to rate making, to movement towards straight, fixed, variable and there's still tracker were approved and then ordered by the Commission for Duke Energy earlier this year too. Our next hearing is scheduled for August 19. And if you think back to the past to how we've typically prosecuted rate cases, we'd get together with the parties, we try to work towards settlement. I'm sure discussions will be going on here, but we won't have more to share publicly on that.

Then lastly on the economy, just a couple of comments. There could be further deterioration; we continue to watch it. It has not been too bad for us to-date. We estimate large customer losses on the year versus our original budget might be in the range of $3 million to $4 million, so not too bad there.

Receivables at this time are in good shape for us, but still we continue to look forward to '08 '09 and try to manage very closely. As two major employers and things going on Toyota, which is significant in our South electric and gas territory we'll have some down time later this year, in early next spring, but it's a fairly new player. They are adjusting production and actually shifting away from the large thunder [ph] trucks. And adding in two other lines next year the smaller car based Highlander SUV if you will.

In Ohio, we'll certainly have risk from some GM plant shutdowns and DHL has talked about offloading their delivery to United UPS I guess. And so there is certainly some risk there in Ohio. One of the other very large employers, like Patterson Air Force Base has announced an initiative all the way out to 2020. So, that's a long-term but on top of the existing jobs and additional add over a long period of time of up to 10,000 jobs.

In Indiana as a state has a budget surplus, it happens to be at state. It's pretty healthy fiscally; the unemployment is running at about the national average of 5.8%. And then the last comment, I'd make is just the ethanol is significant to us. We have five plants in production, 200 constructions, the three plants up and running in the North territory in the first six months produced about 2.5 BcF over term [ph] and produced margin of about $600,000. In the last six months 3.7 BcF are expected and roughly of $1 million in margin.

The two plants in Ohio would be on a relative basis fairly comparable. Next year we expect two new plants in the South territory using both gas and electric and because of that they would be much more significant yet.

So I'm simply raising that ethanol is something else but as the economy goes on, we are watching closely because there is certainly potential for significant additions as well as risk if those don't develop. All in all on the economy I'd say there are some pluses and minuses since the issue we just continued to try to monitor and manage.

Now back to Carl.

Carl L. Chapman - President and Chief Operating Officer

Thanks Jerry and as Jerry mentioned our next four slides, we will give you kind of our latest thinking on issues that are driving the remaining 2008 and also the 2009 earnings for our two largest non-utility businesses ProLiance and coal mining. We also think we can give you some sense of the key longer term considerations as well as we talk about the slides. Also provide some thoughts on the second half 2008 earnings for energy infrastructure services which provide direction on how these businesses should perform longer term as well.

Turning to slide seven, you can see of course that ProLiance's earnings are driven by asset optimization and primarily optimization of contract storage assets. I'll remind you also that we continue to provide significant metrics for each of our four large non-utility businesses on slides 14 and 15. And you can get a sense of our expectations for full year of ProLiance on slide 14.

The 20% to 50% of our optimization and contract storage comes from seasonal spreads. Summer to winter or winter to summer, 40% to 70% from cash to NYMEX and then we've identified a few other areas that provide a smaller amount another 10% to 20%. Obviously, optimization is enhanced by volatility. Although to be clear, not necessarily volatility in price which has been very strong of course but instead volatility in these key spreads, the seasonal and cash to NYMEX spreads, which have been unusually low for several months and I would say particularly low given high prices where you would expect regular volatility in the spreads. Certainly it's too early to call but a continuation of the current '08 '09 seasonal spreads and the latest cash to NYMEX spreads, maintaining only modest improvement in 2009 ProLiance earnings.

But improvements can come first of all from prior years we've hedged about 20% of the '09 seasonal which will be substantially above the current curves. We have an additional 5 BcF including some high deliverability. And we have perks our report [ph] cost in 2008 that will not recur in 2009. And again as I mentioned you can take a look on slide 14 for a full year expectations. Though I'll remind you that fourth quarter is always a very strong seasonal quarter for ProLiance and any significant weather events in either the third or fourth quarter would provide good upside.

However, as noted on slide eight, longer term trends are strong for even more upside opportunity for ProLiance in the longer term. Storage capacity continues to demonstrate really good bag here. We've seen recent successful higher bidding in open seasons and some very nice prices for asset sales, which we believe demonstrates the market's longer term view of storage capacities, value and the optimization that should occur and drive those prices.

We also think, we continue to grow our storage capacity we'll have 47 BcF available by the end of 2008 and as I mentioned before we are also going to have for the first time some high deliverability, high ton storage like Liberty Gas Storage which should provide additional opportunities for us.

We also think gas-on-gas competition should start returning. Really fast growing shale gas supplies are occurring throughout. LNG deliveries to lesser extent but we're very focused on the shale gas supplies which should provide this gas-on-gas competition. And of course that's very favorable for cash to NYMEX spreads as that congestion occurs in the storage area.

ProLiance storage is also very well positioned because it is primarily from pipelines and therefore included in pipeline rate base and that is generally lower cost than market base. So as we see price increases down the road more of ours being rate based by the pipelines, we should not see the same amount of increase.

And we are also very focused on continuing diversified earnings with Midstream assets. for example, the 25% ownership of Liberty Storage that Phase I project in total of the 17 BcF project; our share of that will be a contribution for all of 2009. And then the expansion which our partners Sempra filed with FERC yesterday is the first phase will be all in 2010 and that total project over time, should be about the size of Phase I just a little larger at 17.5 BcF. So, again we see longer term that the opportunities are to be good for ProLiance and we are well positioned to take advantage of these spreads that we've mentioned.

Let's turn our attention now on the coal mining on slide nine. I am sure you are aware of the very significant price increase that's occurred across the coal markets, but for us to look at the particularly in the Illinois Basin. And it's really just simple increased demand and constraining supply. We've got about 120 million tons of roughly a 11000 BTU and 5 pound to 6 pound SO2 coal which of course includes our Oaktown Mines under development which I'll get to some detail on here in just a second.

Spot prices has been over $65 in all the term will of course be discounted to these levels. It just gives you a sense of the really strong run up in coal prices. And we have 80% of our 2009 coal that's available to be priced at these market prices. The only coal that's not available to price at these market prices is the million ton six year contract it goes out through 2013 that we entered last year. But that has a price re-opener after 2010.

All the rest of our coal for 2009 and beyond then is subject to the market prices. We expect about 3.1 million to 3.3 million tons to be sold to our Vectren utility and another 0.5 million to 900,000 tons to be sold to third parties. So, again taking advantage of the market prices going forward. And while negotiations are still underway, our estimation is about a $6 to $14 margin per ton in 2009 and then a reduction of about $2 to $3 per ton for the overhead and interest. It would be our current expectation.

We think beyond 2009 though, very significant improvement is possible in 2010 and again in 2011. Not only does our Cypress Creek Mine, surface mine which is our highest cost mine. So again our average cost going down after nine it depletes in 2009. But then also our lower costs of Oaktown Mines will actually have ramped up production all across 2009 through 2011.

So our higher cost Cypress Creek Mine rolling off and our lower cost Oaktown Mines coming on. And then of course I mentioned earlier, we've got the million tons that will have a price re-opener in 2011. So we see very nice improvement in that $6 to $14 margin per ton should be possible in '10 and again in '11.

Our current production estimates for 2009, 4.6 to 5.2 million tons that include a little bit of inventory carry over. In 2010, 6 million to 7 million tons and I should comment that that's less than previously discussed and now that we have a more detailed plan available for the slope construction on the second mine. However, we are aggressively exploring a faster ramp up of the Oaktown 2 and we will continue to evaluate that possibility. 2011, 7.7 to 8.3 million tons again just a ramp up of the Oaktown Mines.

Speaking of Oaktown Mines on slide 10, we try to give you a sense where we are as well as we're headed. The first thing is that we are very happy to report that our reserves are now up to 88 million tons with new leases secured and I should comment that we're continuing to add additional tons and looking for more tonnage in that same area. So again we think we can grow that tonnage a bit but already have added 10% to that reserve. Our production plans continue though at 5 million tons annually once both mines are completed.

We are on track at first mine and you can see from the picture, the progress that we've already made on the box cut. The substation is complete, the wash plant has begun and so forth, we have noted here starts August and in fact it has now begun and we see production in May 2009.

And, as mentioned we are exploring a speed up of that second mine but for now these dates will lay out there and just see what we are able to do on speeding it up. The box cut, would be commencing in the third quarter of '09. The slope starting in the summer of '09 with production in the fourth quarter. I should comment that period again is a little longer on the second mine because it's a longer slope at somewhat deeper mine and is well the geology its just a bit different as we cut into the mines, so it will take a bit longer.

The challenge is to achieve this a very strong expectation for our coal operation and I'm pretty obvious but just we'll mention it quickly. Obviously, of ten competitive market pricing that's underway, manage the mine development you can see the box cut, I've given you the dates, we are progressing well.

And finally, managing our mine plan in production and improvements at the mines we are accomplishing those improvements Jerry mentioned the prosperity and so we are again starting down how to have improvements in all of our mining operations.

So again the Oaktown Mines are on track and we've given you a sense of our expectations overall.

I'll finish with just a few thoughts on our energy infrastructure business. We are pleased with the progress at both Miller and Energy Systems grew at Miller pipeline. And I will remind you that these are seasonal businesses and so we are not too surprised by the earnings in the first half versus the second half because that's always going to be stronger in the second half.

We expect similar earnings from Miller in the second half of 2008 versus 2007. Just a comment last year or so... last year was the first five year compliance period for Pipeline Integrity Law and that drove very high 2007 results. But offsetting that now, and again matching we think last year will be new bidder better still cash [ph] time work for several customers those are ramping up nicely.

We have more employees working at Miller Pipeline than ever before when I say working that means in the field doing productive work. And we continue our geographic expansion taking advantage of this aging infrastructure trend. We are adding distribution maintenance crews in the South and the East and we did a small complementary acquisition in the South in fact South Carolina, in the second quarter of '08 and that's actually our third small complimentary acquisition in the last two years to take advantage of this geographic expansion.

We expect very nice growth first Energy System Group in the second half of '08 versus '07. We had the delayed release, we were awarded projects now turning around that Jerry mentioned. Backlog is now comparable to the prior year and I will remind you that that the 2007 was impacted by write-off of an investment and lower margin projects. And in going forward the good news is the sales pipeline is very robust, really due to the national focus on energy conservation which is right in our sweet spot of hospitals, universities, government agencies and schools, really a focused on lowering their energy budgets. And then renewables a very fast growing area, in fact we just announced the landfill gas to electricity project here in Southwest Indiana as our latest renewable project.

And with that I think Niel has some closing comments.

Niel C. Ellerbrook - Chairman and Chief Executive Officer

Page 11, summarizes the guidance, we actually put this out July 8th. I think Jerry gave you a good picture of the utility, we continue to see utility businesses in the $1.46 to $1.54 range unchanged from the July 8th guidance. And Jerry, I think highlighted the economy we continue to watch it very carefully but at this stage do not see the impact has been very significant this year. We talked a lot I think about the non-utility business, obviously, we're not pleased overall with where we are versus what we had hoped to achieve.

But I think we've thoroughly discussed that, there's still is opportunity yet this year, but I think our guidance at this point realistically expects lower spreads to continue invest and energy marketing and services not making the contribution that we had hoped but somewhere to what we got last year.

Let's turn to the last page, of our presentation and I'd just like to highlight a few things. We believe we've accomplished a lot in utility business over the last couple of years as we have worked hard to de-risk the business. As we've done that we think we have achieved good balance between investors and customers, and as a result we think we're better positioned than many other companies as we head into what we think is going to be a very tough winter season with prices up fairly substantially. Jerry talked about the Ohio gas case; where we're making very good progress. He mentioned the staff report and he also mentioned rate design, if we can make some progress from rate design, then I think we can make further progress in de-risking that particular gas business as well and we are focused now on the August 19th hearings and the settlement process and hope to see something final there before the end of the year.

While we were disappointed in the results of the non-utility portfolio; at the same time we're optimistic that we still have the right kinds of businesses at the right time ProLiance has established a diverse portfolio and is positioned to take advantage of any return to the spreads or both seasonal and cash to NYMEX differences over the next months, and hopefully we'll get some opportunity there.

Coal mining, Carl did a thorough job of describing that. We are certainly optimistic that 2009 and beyond is going to present us much opportunity there and the market that appears to be creating a lot of favorable opportunity. Energy infrastructure, we think we've got the right businesses at the right time certainly there is going to be a continuation of the replacement of aging infrastructure and I don't think the focus has ever being greater on energy efficiency. And so I think the Energy Systems Group is going to be able to take advantage of that market as well as the growing market in renewables. And as always we continue to emphasize our superior dividend record 48 consecutive years of increases, our yield now at 405 is still attractive.

So with that one I will stop. We would be happy respond to any questions.

Question And Answer

Operator

[Operator Instructions].Your first question comes from Dave Parker.

David Parker - Robert Baird

Just a couple of quick questions. Again thanks, for a little bit of the additional information particularly on the non-utility operation as always; we talk about contracts and as you set up new contracts in 2009 and maybe beyond. Some of these cost pressures, is it possible to be able to work into some of the contract terms ways to adjust that without waiting for a contract to expire or reopen?

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

Yes, Dave. How are you doing?

David Parker - Robert Baird

Good.

Carl L. Chapman - President and Chief Operating Officer

This is Carl. Just quickly, I think the answer is yes. We constantly look at what pass-throughs are available and is really just what will the marketplace allow, we have various pass-throughs as an example, pass-throughs in our contracts on some of these costs related to MSHA on the safety issues related workfalls as an example.

So it's a debate with the customer as to exactly what is available for pass-throughs. So, we protect ourselves on government regulation and concepts. We also look hard at passing through fuel cost although, as we moved towards all underground mining that becomes less of an issue. Because we're generally selling at the mine, we certainly have some diesel fuel at the mine but that's a much lesser issue once the Cyprus Creek Mine is no longer with us.

And I should comment that we've actually hedged now our diesel fuel for the rest of this year at the levels we have in our projection. So we protected that projection in that way and we will continue to look out what other pass-throughs are available. I think this is an evolving area in the market and we've obviously going to match the market but we're going to work hard to get pass-throughs that we need.

David Parker - Robert Baird

Okay good. And the second question switching over to ProLiance and obviously you talked several weeks ago when you modified guidance about just in more difficult market conditions there, and that's probably occurred for last couple of quarters; is there anything that we can look at externally to try to be able to identify some of those opportunities? As you pointed out gas prices at least the commodity natural gas price commodity volatility I always thought created opportunities for ProLiance, that hasn't happened today. So is there anything we can look at externally?

And then secondly maybe just give us sort of your pull out the crystal ball and give us what you're seeing here in third quarter and four quarter maybe as far as market opportunities?

Carl L. Chapman - President and Chief Operating Officer

Yes, the reason Dave, that we've tried to make the comment as we look forward did not only to just the rest of '08 but also into '09 is the one that has the most visibility is really the seasonal and that's really just looking at the NYMEX for the periods between seasons. So, if you look at those forward curves and right now that curve is lower than it's historically been. And, so what we've done is just said we're right now thinking in terms of it staying there for a while. This has been the case for several months.

And so we've suggested that as we look at that curve its lower and we will just put that in our expectations right now for '08, '09. But we would believe that would stretch out in a longer term. When we look at the cash to NYMEX or the month's spread its much less visibility but the things that often drive that of course would be weather but also a big one in this whole congestion issue we mentioned. So, this year we started with storage pretty empty and then all year long we've had this comparison to last year's storage. And so you've not seen the typical gas trying to find a home. But as the shale gas, really starts to come into play and then eventually LNG, we think that congestion will be back. So, that's really what will drive so much of that cash to NYMEX. But it's more difficult to predict without a doubt, but the seasonal you can get a sense of by looking at the NYMEX.

And just one more comment on this volatility and so I made the one comment I did, I know, we've talked about volatility. And generally we would have thought with these high prices you would see more volatility in the spreads. But what you are seeing is the front where the prop [ph] month moves and the other ones move the same. That's very unusual.

David Parker - Robert Baird

Okay.

Carl L. Chapman - President and Chief Operating Officer

And that's what has caused us to talk about not having volatility even though we've had high prices.

David Parker - Robert Baird

I got you. Thank you for that. Maybe one last question, on your slide 14, which you referenced a few times Carl, we've got a line margin from asset optimization and I think there was nothing listed for the second quarter of '08 but 82% in the second quarter of '07, could you explain that number just a little?

Carl L. Chapman - President and Chief Operating Officer

Yes all that is it's just a, maybe we should even a footnote it or something. All it is we have actually had negative margin from asset optimization, and so therefore it makes it a very odd percentage and we just didn't use it. So that's all it means. In terms of contributing to that loss, it would be a very high percentage of that loss on the gross margin line would be from asset optimization.

David Parker - Robert Baird

Typical number Carl is it around as you noted here from 70% to 85% or so, is that true?

Carl L. Chapman - President and Chief Operating Officer

Yes I would say this is a little lower because we would normally expect more from the storage optimization. Therefore, it would be a higher percentage. So you might want to look back at some prior periods on that to give you a little better sense of it. And of course as we add more storage capacity that percentage goes up.

David Parker - Robert Baird

Great, all right. Thank you very much.

Operator

[Operator Instructions]. Your next question has come from Chris Shelton with Millennium Partners.

Chris Shelton - Millennium Partners

Good morning, guys. Can you hear me?

Carl L. Chapman - President and Chief Operating Officer

Yes.

Chris Shelton - Millennium Partners

Just wanted to get a little color on, you guys have talked about all the one of the tons going to market at the end of the year at the coal business; wanted to get a little flavor as to how the utility goes about procuring its coal, will it do an RFT, you know will be kind of a market based procurement?

Niel C. Ellerbrook - Chairman and Chief Executive Officer

Let me make a comment or two on that, Carl may jump in, but from the utility side historically we had done certain market tests and also a cost plus pricing. But all of that especially when there's sales from an affiliate involved, needs to have sort of a market background to it, market flavor to it and sort of an arms length flavor to it. So it's an excellent question, I would say that historically it was always grounded in sort of a market test.

As we look forward I think I'd make the same comment, that when we work with regulators and the like what they are looking for first and foremost is some comfort around sort of a market test and we'll be endeavoring to support it sort of in that way. I am probably not going to go into a whole lot more specifics, maybe that item or the negotiations around the other contracts either, but I think we will seek evidence to support sort of market and we believe that's probably the fairest for the pricing to go. from a customer's perspective if you will.

Chris Shelton - Millennium Partners

Yes, so it sounds like there hasn't been any discounts kind of corporate discounts from the coal utility. I mean from the coal company to the utility on the past and so there is no reason to think sort of going forward is that, that kind of paraphrase it well?

Niel C. Ellerbrook - Chairman and Chief Executive Officer

I would just say that when Carl gave the estimates of the overall margin potential I think we took into an account where these, at least our guess is where these contracts and maybe production costs will come into play.

Chris Shelton - Millennium Partners

I appreciate that and then I actually had one other question. You have used the market code of $65 for the Illinois Basin, is that coal pretty similar to yours or does your coal have some characteristics that may get even you know at least a $65 or maybe more valuable coal.

Carl L. Chapman - President and Chief Operating Officer

Again Chris on that $65 what we mentioned is that that is the spot price and that is what is... generally what is available publicly, that's why we quote that price. And we would expect that a contract or a term contract would be discounted below that. But in terms of our coal, it's generally in line with that coal. That's why we use that number. We do have just a little lower sulfur at our Prosperity Mine, but it's becoming close enough that we think Prosperity is likely to trade in this general range with the Oaktown Mine as well.

Chris Shelton - Millennium Partners

Okay. So the discount would be for a term contract but otherwise if you are selling starts there's no real reason to see a discount. I may have misunderstood your comment?

Carl L. Chapman - President and Chief Operating Officer

Yes, there's if we were selling at spot, but again as I mentioned as we went through it, we don't really expect to keep a lot open for spot in 2009 or later years. We are looking really to lockup our coal under term contracts.

Chris Shelton - Millennium Partners

Okay. Thank you and one other clarification actually I wanted to sorry--

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

This is Jerry. I think it's important to understand that there can't be a fairly significant difference between spot and term prices.

Chris Shelton - Millennium Partners

Right, okay. Then the other question I had was on the diesel pass-throughs. I think I was listening to another coal company call in your area, sounds like they are able to pass the diesel through. Are you guys confident on that front as well or any reason to doubt that you will be able pass the diesel cost through?

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

Well, again it depends on the contract and how long. So, for 2008, in some cases we have pass throughs and some cases we don't. But again the real key issue I think, thinking about coal longer term is that diesel is just not a very big issue for us post 2009, when our surface mine goes away. We'll be all underground, 2000... late 2009 and then beyond. And so, diesel is not that big a deal. And again it just depends on the contract and the length of time, what price you provide. I think what you'll see is some contracts have a pass-through some don't, but as I mentioned earlier, we are going to be looking at on all of our contracts the best way to protect ourselves on pass-throughs and match the market.

Chris Shelton - Millennium Partners

Got you. Thank very much for the time this morning guys.

Steven M. Schein - Vice President - Investor Relations

Thank you.

Operator

Your next question comes from Oliver King with Zimmer Lucas.

Oliver King - Zimmer Lucas

My question has been answered. Thank you.

Operator

[Operator Instructions]. Your next question comes from Gabe Moreen with Merrill Lynch.

Gabe Moreen - Merrill Lynch

Hi, good morning, guys.

Niel C. Ellerbrook - Chairman and Chief Executive Officer

Good morning, Gabe.

Gabe Moreen - Merrill Lynch

Question I guess in terms of just the timing around the contracts for 2009, is that something I don't know if Carl had mentioned in terms of when you expect to be able to announce something on that? Is that something that's year-end or next quarter?

Carl L. Chapman - President and Chief Operating Officer

Gabe I think we don't have a precise timing at this point. But it's more likely to be in the fourth quarter. Just because of working through; first of all Jerry already mentioned that we'll sit down at some point with the consumer counselor on these prices on the market prices. So again by the time we work through these things it's likely to be a little later. We're still likely to talk about ranges however, because often times our customer isn't going to want prices quoted. So we're likely to talk about margins and ranges as compared to individual prices on contracts.

Gabe Moreen - Merrill Lynch

Okay, got it. Thanks Carl. And also Carl in terms of securing additional leases at Oaktown, I mean in terms of the order of magnitude there and what you're able to accomplish, is there any color you can give us in terms of just how many more reserves you are looking at sort of securing there as you lease up additional stuff?

Carl L. Chapman - President and Chief Operating Officer

I think Gabe the answer is, is that we'll know more as we just continue to follow it. I would say what we can add is not going to be a real large number compared to the starting point but I think we certainly think in terms of adding levels that we have already added and a bit beyond.

Gabe Moreen - Merrill Lynch

Okay great. Thanks very much.

Operator

Your next question comes from Matthew Ligas [ph] with Corvus Capital [ph].

Unidentified Analyst

A quick question on slide nine, the $6 to $14 margin, is that a gross margin or does that include the overhead interest incorporate?

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

That does not include the overhead. So again it will be $6 to $14 on the margin and then overhead and interest would be $2 to $3 knocked off of that.

Unidentified Analyst

Okay. Thanks

Operator

There are no further questions at this time. Do you have any closing remark?

Steven M. Schein - Vice President - Investor Relations

Yes. We would like to thank all of you for your participation. We do look forward to talking to you in the future. And again we thank you for your interest in Vectren. Operator that does conclude our call.

Operator

Thank you for joining today's conference call. This call will be available for replay beginning at 11:00 AM Eastern Time today till 11:59 PM Eastern Time on August 6, 2008. The conference ID number for the replay is 54814900 again the conference ID number for the replay is 54814900; the number to dial for the replay is 1800-642-1687 or 706-645-9291.

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Source: Vectren Corp. Q2 2008 Earnings Call
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