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Edited Transcript of VVC earnings conference call or presentation 6-Nov-18 7:00pm GMT

Q3 2018 Vectren Corp Earnings Call

EVANSVILLE Nov 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Vectren Corp earnings conference call or presentation Tuesday, November 6, 2018 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carl L. Chapman

Vectren Corporation - Chairman, President & CEO

* Dave Parker

Vectren Corporation - Director, IR

* M. Susan Hardwick

Vectren Corporation - Executive VP & CFO

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Conference Call Participants

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* Ryan Michael Levine

Citigroup Inc, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Vectren Corporation Third Quarter 2018 Earnings Call and Webcast. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Dave Parker, Director of IR. Please go ahead.

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Dave Parker, Vectren Corporation - Director, IR [2]

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Thank you, Chad. Good afternoon, and thanks for joining us on today's call. Yesterday afternoon, we released our 2018 third quarter results, and this morning, we filed our Form 10-Q with the SEC. You can access these 2 items as well as today's earnings call slide presentation through our Investor Relations home page, investors.vectren.com. This call is being webcast, and shortly following its conclusion, a replay will be available on our Investor Relations homepage.

As described on Slides 3 to 5, many of our statements we will make on this call are forward-looking statements. Actual results may differ materially from those discussed in this presentation. Carl Chapman, Vectren's Chairman, President and CEO, will provide today's opening comments on consolidated third quarter and year-to-date 2018 results, our firm consolidated EPS guidance and updates to segment guidance and an overview of the status of the merger with CenterPoint Energy. Susan Hardwick, Executive Vice President and CFO, will then provide an update on Utility regulatory activity and Nonutility results followed by a few closing remarks. Also joining us on today's call is Ron Christian, Executive Vice President and Chief Legal and External Affairs Officer. Following our prepared remarks, we'll be glad to answer questions you may have.

With that, I will turn the call over to Carl.

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Carl L. Chapman, Vectren Corporation - Chairman, President & CEO [3]

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Thanks, Dave, and thanks for joining us on our call today.

Turning to Slide 6. Yesterday, we reported consolidated third quarter 2018 net income of $59.2 million or $0.71 per share, excluding reconciling items, compared to consolidated net income of $61.9 million or $0.75 per share in the third quarter of 2017. Reconciling items for the quarter include $8.8 million after tax or $0.10 per share of expenses booked in the quarter related to the proposed merger with CenterPoint.

Year-to-date, consolidated 2018 net income was $164.5 million or $1.98 per share, excluding reconciling items, compared to $154.8 million or $1.87 per share for the 9 months ended September 30, 2017. Reconciling items year-to-date include $20.2 million or $0.24 per share of expenses related to the merger; an after-tax charge of $13.1 million or $0.16 per share recorded in Q2 2018 related to ProLiance's investment in LA Storage, a joint venture with Sempra and a gas storage facility; and a $4.9 million or $0.06 per share 179D tax benefit.

During the remainder of this call, we will exclude these items when discussing financial results. A reconciliation of reported GAAP results to non-GAAP results reflecting the merger-related costs and the ProLiance investment impairment charge is included in the Appendix.

Moving on to Slide 7. For the year-to-date period, Utility results were $0.13 per share over 2017, continuing to reflect strong earnings from infrastructure investments and the favorable impact of weather in 2018 as compared to 2017, partially offset by increased depreciation from investments without accelerated recovery and the impact of power plant maintenance year-over-year. Nonutility earnings were down $0.01 per share compared to the prior year, reflecting the approximately $200 million Ohio pipeline project completed in 2017, partially offset by the lower corporate tax rate in 2018.

Turning to Slide 8. We are affirming our consolidated 2018 guidance in the range of $2.80 to $2.90 per share. And we remain on track to achieve the midpoint of this range, reflecting the strong financial performance realized year-to-date and the outlook for the fourth quarter. With favorable weather realized to date, Utility EPS is now expected to be within a range of $2.25 to $2.30 per share, while Nonutility, Corporate and Other EPS is now expected to be within a range of $0.55 to $0.60 per share due largely to the timing of large transmission project work. All guidance excludes the reconciling items I described earlier during the call. The consolidated guidance also reflects minor holding company costs.

Turning to Slide 9. We were pleased to announce that last week, our Board of Directors approved an annualized dividend increase of $0.12 per share or 6.7%. That brings our annualized dividend to $1.92 per share. This increase marks the 59th consecutive year that Vectren and its predecessor companies have increased the annual dividends paid. We're very proud to achieve this level of long-term commitment to our shareholders.

Before I turn the call over to Susan, let me provide an update on merger-related activities highlighted on Slide 10. In late August, Vectren's shareholders approved the proposed merger with CenterPoint with over 95% of the votes cast in favor of the transaction. In early October, FERC approved the merger. And as we mentioned on last quarter's call, clearance under the Hart-Scott-Rodino Act has also been received as well as approval from the SEC. As we also mentioned last quarter and fully described in the 10-Q, 7 purported Vectren shareholders have filed lawsuits under the federal securities laws challenging the adequacy of the disclosures made in our proxy statement in connection with the merger. We believe these complaints are without merit and do not expect them to impact the timing or the outcome of the proposed merger.

The voluntary submittal of information to both the Indiana and Ohio commissions is the remaining merger-related regulatory activity. As you may recall, the merger does not require change of control approval in either state. On October 17, a hearing was held with the Indiana Commission to review the merger-related information submitted in mid-June. A post-hearing filing schedule was established, wrapping up by December 21 of 2018. We expect a final word from the Indiana Commission in early 2019.

In Ohio, a hearing before the commission is not anticipated, and a final order is also expected in early 2019. Subject to the closure of the Indiana and Ohio informational dockets, we continue to anticipate the merger closing will occur no later than the first quarter of 2019. Preparation for post-merger integration continues where we have successfully completed the analysis phase and are progressing well in the design phase.

And with that, I'll turn the call over to Susan.

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M. Susan Hardwick, Vectren Corporation - Executive VP & CFO [4]

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Thanks, Carl. Slide 11 provides an overview of our very busy regulatory calendar. In mid-October, we completed the Indiana Commission hearing on our generation transition proposal. As you will recall, in February, we filed a request with the commission related to an 800- to 900-megawatt combined cycle natural gas plant and required environmental upgrades to our F.B. Culley Unit 3 generating plant. As expected, the areas were very thorough with all parties actively participating, including consumer advocates and representatives from the coal industry and environmental groups. A post-hearing briefing schedule was adopted, which wraps up at the end of February 2019. We expect the final order to be issued in the first half of 2019 with construction beginning by the end of 2019.

In October, Vectren, along with all but one of the parties in the case filed a settlement with the Indiana Commission regarding our request to add 50 megawatts of universal solar generation. A hearing is scheduled for November 19, and we expect to receive a final commission order in the first half of 2019. Construction would begin shortly after with an expected in-service date in 2020.

At the end of September, we received the Ohio commission staff report related to our first Ohio rate case filing in more than a decade. While the staff recommended a reduction in our original revenue request, it was supportive of the continuation of our distribution replacement rider and straight fixed variable rate design. The staff's revenue recommendation consisted primarily of a lower ROE, a shift in recovery mechanisms and some lower operating costs. In October, we filed additional testimony to support our filed revenue request. The commission in Ohio has scheduled an evidentiary hearing to begin on December 4, with a final order expected in early 2019.

Before I move on to the Nonutility results, I'll provide a brief update related to Vectren's credit ratings. In October, S&P issued new reports on Vectren's subsidiaries, noting an unchanged A- credit rating with negative outlook. Also, Moody's affirmed their current Vectren Utility holdings' credit rating of A2 but changed the outlook from stable to negative. Actions by both agencies were as expected and reflected the broader impact on the industry from tax reform, primarily from lower cash flow due to the end of bonus depreciation and a large capital expenditure program.

Now moving on to our Nonutility results on Slide 12. Year-to-date, VISCO EPS saw a decline of $0.04 per share compared to 2017, primarily reflecting the large Ohio transmission project that was completed in '17 and the wet and cold weather in the first quarter of 2018 that delayed the start of the construction season. The distribution portion of the business has continued to perform very well in 2018, achieving the growth we expected year-to-date. However, since the transmission portion of the business had not secured large project work through October, we've lowered VISCO's guidance for the year by $0.05 per share.

Overall, VISCO backlog remains high at $715 million, reflecting continued strong demand for construction services. And importantly, VISCO is in contract negotiation for an approximate $300 million transmission project. Once brought to closure, work can begin this year with completion of that project expected by end of 2019.

In addition to this project, the bidding activity remains very strong with over $500 million in bids outstanding. As we have mentioned in the past, VISCO's focus remains on the recurring work in both distribution and transmission. However, opportunities for large transmission pipeline construction projects will continue to be pursued. The large projects provide very strong revenues and showcase our capabilities but obviously create earnings volatility on a year-over-year basis.

At VESCO, year-to-date 2018 earnings were up $0.03 per share compared to 2017, excluding the 179D benefit recognized in the first quarter of '18. Demand for performance contracting and sustainable infrastructure opportunities continue to be very strong. At September 30, 2018, the backlog of signed contracts increased to nearly $220 million compared to $180 million at September 30, 2017. The estimated sales funnel at September 30, 2018, totaled nearly $370 million, while $222 million in new orders have been signed year-to-date, and that compares to $118 million in the same period last year. Although signings year-to-date are slower than expected, we still anticipate that VESCO will achieve its goals for both earnings and new orders for the year, which should result in a very strong start to 2019.

Let me wrap up our prepared remarks by noting again that good year-to-date financial results keep us on track to provide yet another year of consistent earnings growth. In the coming months, as we prepare to complete the merger with CenterPoint, we remain focused on successfully executing our key strategic initiatives, including executing our regulatory plans in Indiana and Ohio as well as working closely with CenterPoint to wrap up the 2 remaining state regulatory dockets as quickly as we can.

And with that, operator, we'll ask for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will be from Ryan Levine with Citi.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [2]

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Just wanted to clarify on Page 20 of your presentation material. It looks like the backlog on VISCO is declining, and I was just curious if there's any change to your bidding behavior in light of the pending merger or any change in composition of your -- of what projects you're pursuing in VISCO.

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Carl L. Chapman, Vectren Corporation - Chairman, President & CEO [3]

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No, Ryan, there's really no change because of the merger. It's business as usual. And I would say that we still see a lot of bidding activity. Obviously, the blanket numbers are higher. That's a good thing. So that's continuing work. And on the bids side, it's just more of an issue of timing of projects.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [4]

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Okay. Are you seeing any change in labor price as you're looking to execute on these projects? And any change in contractual provisions regarding labor?

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Carl L. Chapman, Vectren Corporation - Chairman, President & CEO [5]

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I don't think that we're seeing anything of significance there. Obviously, we watch that closely. As you know, we are a union shop. We've got great relationships with the unions and continue to have that. So I don't think we're seeing any big changes. We obviously keep very close watch on it as we bid to make sure we've got the skilled workforce we need, but we've not had any problems.

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Operator [6]

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(Operator Instructions) Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Dave Parker for any closing remarks.

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Dave Parker, Vectren Corporation - Director, IR [7]

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Thank you, Chad.

And on behalf of the entire Vectren team, I'd like to thank everyone for joining us on the call today. With that, we'll conclude our call.

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Operator [8]

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Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.